Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

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Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

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............................... 53 Figure 28: Vancouver .............................. 50 Figure 27: Victoria ........................................................ 47 Figure 24: Outlet Volume vs....................................................... 24 Figure 5: Canadian Retail Outlet Population .............................................. 36 Figure 17: Study Market Methodology ..........Price History...................................................................Selected Centres ...................... ex-tax elements ........................Price History ....................................................................... 43 Figure 20: Ex-Tax Pump Price Elements ....................................................................................Price History ...................................................... 4 Figure 2: 1996 Average Prices/Margins ........................................ 66 Figure 35: Saint John NB .......... 28 Figure 8: Outlet Representation by Service .......................................................................................................................Price History......................................................................... 33 Figure 13: Monthly Gross Marketing Margins......... Income............................................................................................................................................................................... 71 MJ ERVIN & ASSOCIATES i ..................... 63 Figure 34: Montreal .. 40 Figure 18: 1995 Average "Blended" Pump Price .................................... 16 Figure 3: 1996 Average Regular Gasoline Margins (56.......................... 56 Figure 30: Regina ................................... 46 Figure 23: Average Annual Throughput per Outlet.......Price History..................................Price History .................................... Gross Product Margin .....................................List of Figures Figure 1: Pump Price / Margin Model............. 35 Figure 16: Monthly Demand vs............................. Pump Price (nominal ¢/litre).............Price History.............. 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ....... 62 Figure 33: Ottawa ......... 49 Figure 26: Outlet Revenues....... 34 Figure 15: Monthly Rack Prices: Selected Markets ............................................................... 58 Figure 32: Toronto ..Price History......................... 30 Figure 10: CPI Index Comparison ..................................... 44 Figure 21: Gross Marketing Margin Elements ............ Costs......................... 25 Figure 7: Outlet Representation by Mode................... 54 Figure 29: Calgary ...................................................................... 42 Figure 19: Pump Price ..................................................................................................................................................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ................................................Price History .................... 32 Figure 12: Monthly Margins 1991-1996 (Nominal $)...............................................................................................................................................1988-1995 ......................................... 29 Figure 9: Annual Gasoline Price (Cents per Litre) ..................Price History ..................................Regular Unleaded ..8¢ Pump Price) .....................tax................................................................................................................................ 57 Figure 31: Winnipeg .......................................................................... 45 Figure 22: Petroleum Gross Product Margins ..Price History ....................... 70 Figure 37: Charlottetown ............... 48 Figure 25: Outlet / Volume Relationship ..................................................................................... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category................ 69 Figure 36: Halifax ........Regional & Urban Groupings..............................Selected Goods & Services ............ 24 Figure 6: 1995 Retail Outlets by Province ...........................................................................

..................................................... 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue.................... 1996 ... 15 Table 3: Selected Study Markets ................................................... 13 Table 2: Taxes on Regular Gasoline on December 31........................... 51 MJ ERVIN & ASSOCIATES ii ..................................................................................List of Tables Table 1: Downstream Sales Channels ...............................

This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry. This study.5 cents per litre on the sale of regular gasoline in a typical major urban market.8 ¢ TAX 28. rack.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.5 ¢ 0.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.2 ¢ 24. the Canadian retail marketing sector realized an average gross product margin of 3.4 ¢ 19.3 ¢ 28. and the Canadian Petroleum Products Institute (CPPI). This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. each with unique MJ ERVIN & ASSOCIATES iii . Natural Resources Canada (NRCan). Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. Price competition occurs at three distinct levels in this industry. 1996 Average Prices and Margins . The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. and a foundation for effective policy development. and ex-tax pump prices. These prices are determined in a competitive marketplace. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada. represented by crude. together with a separate review of the refining sector.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.1 ¢ 5. dealer income. supplier costs and profitability.

ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). While each of these marketing channels operates in a competitive environment. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. nine of the past ten years. well over half of all outlets in Canada operate as lessees or independents. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . and declined by 10 cents per litre measured in constant dollars. Approximately 16.500 retail outlets were in operation in Canada in 1995. the responsibility for deciding upon retail pump prices resides principally at the local dealer level. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. and the traditional automotive service bay. From 1986 to 1995.dynamics. Convenience store. which potentially allow for reduced margins at the gasoline pump. Dealers have a variety of relationships with their supplier. and accordingly. compared to about 22.000 in 1989. The resultant margins are therefore a reflection of the state of product supply. this study focuses on the retail gasoline sector. demand and other competitive factors existing at the time. due to its prominence in the public and media domain. are examples of ways in which outlet petroleum sales are augmented by other revenues. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. car wash. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $).

This has both resulted in. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack .The “tax-included” nominal pump price increased over this same period. Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg. however. while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. As a result of these trends.crude) 5¢ Marketing Margin (retail . and has been a result of several factors including: • • • improved refinery utilization and efficiency. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. From 1991 to 1996. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. MJ ERVIN & ASSOCIATES v . the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. as a consequence of refinery plant rationalization (closures) and a modest demand increase. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump.

wholesale product cost and freight charges) were isolated from the pump price. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. With few exceptions. although this study provides an independent confirmation of this. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. and one by one. several “outside variables” (product taxes. rural markets. US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. but also had significantly higher throughputs per outlet.Comparison of Canada. With the participation of several CPPI member companies. This provided for market-bymarket and regional comparisons of key competitiveness indicators. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. When petroleum gross product margins were compared to their corresponding outlet throughputs. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. This was integrated with selected NRCan price data. A wide range of petroleum gross product margins were evident. MJ ERVIN & ASSOCIATES vi . proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. were selected for a detailed review of outlet economics. 19 markets representing a broad range of conditions. to derive 1995 average petroleum gross product margins for each of the 19 markets. That such a relationship should exist was not surprising.

000 3. smaller markets.962 R2 = 0. the residual revenue is available as profit to be re-invested into retail operations. head office and regional office overheads. not poor competition. and his personal labour investment.6624 1.000 2. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance.000. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .000.. which reflects his investment in the outlet. and in major vs. These costs would include salaries of marketing representatives and management. brand advertising.• Smaller markets performed as competitively as larger centres. sales processing.000.000 6. Consequently. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region.000 Volume (litres) 4. and/or distributed to shareholders. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue.6634Ln(x) + 76. corporate charity.000. an additional goal of this study was to undertake a comparison of outlet profitabilities. supplier profit: after the above costs are allocated. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer.000.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. revenues from ancillary operations (eg: convenience store.000. of which gross product margin and throughput are only two of several factors.000. This study showed that an average outlet net revenue in the 19-market study group was about $70. etc.000 5.

000 $200. were insufficient to cover outlet costs. and that petroleum sales revenues alone. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. respectively. $61. after allowing for estimated dealer profit and supplier overhead. for which this study had no specific data.market study group.000) $(350. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii .000 $150.000 $250.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. at 1995 prices. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. distant outlets are clearly higher than those associated with concentrated urban markets.000 per year. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . suppliers likely incurred a net loss on outlet operations in 1995. Although an objective measure of competitiveness is elusive. 1.000 $50.000) $(150.000 $100. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000) $(250. The Canadian retail petroleum products industry. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.$154.000 vs. Average Outlet Income (before marketing overhead costs) BC/PR $300. Despite this difference. by all objective measures available to this study.000) $(200.000) $(100.000) $(300. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

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While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

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driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

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profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. That such a relationship should exist was not surprising. despite the predisposition of many observers to use them as such. Both the downward trend in margins. virtually all of the 19 study markets exhibited similar levels of competition. and the associated industry initiatives which are ongoing in nature. Indeed. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. assuming all other costs were unchanged. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). When these margins were compared to their corresponding outlet throughputs. most markets. Industry profitability is extremely sensitive to very small changes in pump price.• • • improving production efficiency through refinery plant rationalizations (closures). Thus. but to increases in underlying rack prices. Also. based upon an assumed posted rack price. regardless of size. this industry sector would have realized profits of unprecedented proportions. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. although this study provides comprehensive evidence of this. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. Outlet throughput is a key determinant of inter-market pump price differences. While these economics might appear to place this industry in a position of poor viability. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). serve as perhaps the most significant indicators of competitiveness in the downstream industry. if Canadian average pump prices were only one cent higher than they were in 1995. and in turn. Nevertheless. crude costs. Also. When plotted against the margin-volume model. had petroleum margins which were commensurate with average outlet throughput for that market. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. A wide range of petroleum gross product margins were evident within the 19market study group. not excessive profits. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . these findings clearly show that pump price increases are ultimately linked not to increased profits. Thus. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. in the long term these fluctuations are likely more reflective of market restorations. most outlets used in the 19-market study represent major integrated oil companies. 8. Thus. 7.

In suggesting this approach however. reduce pump prices. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. • • At first glance. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. MJ ERVIN & ASSOCIATES xiii . thereby improving petroleum volumes and ancillary revenues at the remaining sites.5 million fewer litres of gasoline than a group A (major centre) station. The costs of most consumer goods in smaller. more isolated markets are generally higher than in larger centres. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. This created some economic pressure to sell product at a higher pump price. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. poor outlet throughputs were generally the predominant factor. the solution would be to encourage some dealers to exit the market. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. The loss of employment represented by a station closure may be of some concern to smaller communities. reducing the number of outlets may also reduce the number of competitors. average pump prices were relatively high. A full-serve retail gasoline outlet typically employs 3-5 staff. While competitiveness in most smaller markets was shown to be as active as in larger centres. it would seem that if local government in smaller markets were interested in lowering pump prices. in order to build upon the findings in this study towards a full understanding of the dynamics at work. which could actually inhibit competition. Smaller. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1.product margins than larger markets. other factors exist which contribute to relatively high margins and prices. and this study showed that gasoline prices were no exception. there are three points to consider: • • In very small markets. isolated markets face particular challenges: although found to be highly competitive. which should. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. 9. according to the margin-volume model. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17).

MJ ERVIN & ASSOCIATES xiv . Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). are an acceptable limitation on pure competition (Finding 8). possibly to the detriment of the consumer. as marketers find even more innovative ways to attract market share. as it does in the Canadian petroleum marketing sector. The historical record is clear however: since deregulating pump prices. This study proposes rather. is well beyond the scope of this study. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). and in turn. does not appear to benefit in consumer terms. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and likely others in Nova Scotia. This competition then. Also. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. depressed petroleum revenues.10. has seen a decline in pump prices relative to other Canadian markets. is both the cause and consequence of increased activity in ancillary operations. and the traditional automotive service bay. The federal Competition Bureau for example. the Halifax market. Retail ancillary operations are a critical element of petroleum price competition. is viewed as an agency which exists to the benefit of industry and consumer alike. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. 11. and the perceived effect on their markets. As these findings show. under the current PEI regulatory structure. Convenience store. car wash. Charlottetown. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. the degree of price competition in the retail petroleum has in effect. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. will likely preserve a highly competitive petroleum market. characterized by narrow product margins and relatively flat pump prices. and as such. many national and local environmental regulations exist for good cause. that where a healthy competitive climate exists. direct regulatory interventions may have an adverse effect on competitiveness. sometimes below that of outlet operating costs.

Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. margins and competitiveness factors. Public perception measurement. Develop cooperative industry research into marketing sector competitiveness issues. Improve public understanding and awareness of competition in the petroleum marketing sector. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. along the lines of the model used in this study. This should be in the form of a quarterly summary of price trends and related measurements. using Canadian and foreign selected markets. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. petroleum marketing competitiveness. in a simple format designed for consumers and legislators. • • MJ ERVIN & ASSOCIATES xv . and the nature of competitiveness influences. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. A regular comprehensive competitiveness evaluation. not inhibit. 2. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. and the converse image held in much of the public domain. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. using Canadian and foreign selected markets. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government.1.

• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. using Canadian and foreign selected markets. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and in particular. consumers. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and issues/opportunities facing such markets. and regulators alike. by industry. MJ ERVIN & ASSOCIATES xvi . • * * * Better understanding of this industry. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.

and . including a regional.to provide a sound database upon which more effective policy decisions can be made... Specific purposes of this study would be: • • • • “. . provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made. and regional differences which face the petroleum products retail industry.to analyze the rack to retail market and the market structure for refined petroleum products.Introduction Background Canada’s petroleum refining and marketing sectors.. In 1995.. to name a few. region by region across Canada. .. or petroleum marketing portion of the study.” MJ ERVIN & ASSOCIATES 1 . Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. face a number of challenges: a poor public image.to draw comparisons with nearby USA markets. and Industry Canada was convened to undertake this project. and MJ Ervin & Associates was selected to undertake the “rack to retail”.to determine the key factors which drive competitiveness in specific markets. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.to better understand the competitive opportunities and challenges.. competitive pressures from US and offshore refiners. A working group represented by Natural Resources Canada (NRCan). and a challenging array of potential environmental initiatives. leading to more effective policies and reduced uncertainty for future investment. Project Objectives The working group established as the primary objective of this study “.. and in comparison to the Canadian national average and nearby USA markets”. or even communities within the same region. and in the process. and that issues and challenges be identified so that conclusions and recommendations can be made “. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. the Canadian Petroleum Products Institute (CPPI). which comprise the “downstream” oil industry.to help the industry cope and to enhance competitiveness. The SCF laid the foundation for supplementary studies......

It also relates consumer demand patterns to pump price fluctuations. The study does provide comparisons with US markets on a national level of detail. from which some important findings are made. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. Part D: Selected Market Study presents the findings of a diverse 19-market study. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). in Appendix I. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Specific comparisons of specific Canadian and US consumer markets were not made. margins and demand patterns over the past several years. and the effect of competitiveness on each subsector. Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. • Part E: Conclusions and Recommendations summarizes the study findings and. or which have a specific meaning in the context of this report. Ultimately. Findings are stated in bold and are summarized in part E of this report. presents conclusions and recommendations which arise from the study findings. Supporting data to these charts can be found in Appendix II. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . undertaken as part of this project to: • make a more detailed examination of price. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. due to the considerable data gathering difficulties that such an approach would entail. Many of the findings in this report are presented in graphical form. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. Part C: Historical Trend Analysis provides an overview of prices. and a foundation for effective policy development. and in order to provide insights into the range of competitive dynamics that can exist. Unless otherwise stated. through a multi-faceted approach.The study meets these objectives.

. We gratefully acknowledge these companies. Shell Canada. Natural Resources Canada. and provided critical guidance and feedback at several key stages in the process. CPPI. and also participated in the steering committee. Petro-Canada. and their 481 retail associates whose outlet data was used in our analysis. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. Finally. for their assistance. Suncor Inc. MJ ERVIN & ASSOCIATES 3 . Suncor Inc. These included: Canadian Tire Petroleum. Ministère des ressources naturelles du Québec. Consumers Association of Canada.. Petro-Canada. through Maureen Monaghan and Huguette Montcalm. assisted in securing the support and participation of member companies in the selected markets phase of the study. and Industry Canada. chaired the steering committee.. Ontario Ministry of Environment and Energy. The Canadian Petroleum Products Institute. • • Several organizations participated in two key review sessions. Imperial Oil Ltd. Environment Canada.• Industry Canada. NRCan. facilitated some of the data gathering needs of this study. and Shell Canada. including Ultramar Canada.. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). through Bob Clapp.

It is this particular feature of petroleum products . These relationships can be modeled. and serves to explain several factors that together determine retail gasoline prices at any given time. Yet. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. principally of motor gasoline. its price.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. the particular quality of gasoline which is of most interest to consumers is not its colour. but simply. multifaceted industry. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. unlike many consumer products.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. texture. as this study shows. as they are in Figure 1. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector. or taste. And. An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . In fact. most Canadians relate to this industry in one specific way: as consumers.price . This price/margin model thus creates a common reference for understanding the economics of retail gasoline. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry.

Many of the terms introduced and explained in this section are used extensively throughout this study. these stakeholder revenues are derived from the revenue from the retail sale. (implying that the stated margin represents net income or “profit”). each essentially taking a share1 . gross margin represents revenue only. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. evaluating competitiveness is therefore a partly subjective process. So defined. this study’s use of the term relates to gross margin. and in fact inextricably related.from the total pump revenue. From an industry perspective. is more likely to equate the term with “value for money”. Before examining each of the model elements. but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. While this term is often associated with the phrase “profit margin”. Each margin is quantified by its defining prices. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). “competitive” may be synonymous with “viable”. margins are squeezed or expanded accordingly. A consumer however. it is important to define the term “margin”. Gross margin is simply the difference between two price points. consumer perspective. objective measurement for competitiveness. While both perspectives are valid. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. MJ ERVIN & ASSOCIATES 5 . any operating expenses must then be considered before making any determination of profits. The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. this study examines competitiveness from the latter. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. Ultimately however.or margin . an understanding of the term itself is necessary.

the degree of competition within a market. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . The actions by business rivals place an upper limit on the prices a firm can charge for its products. represents a process by which prices are set. 1986: “Competition may mean very different things to different people..” “. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn.Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. More importantly. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. Competition can only be sustained therefore. if market conditions allow a sufficient number of players to remain profitably engaged. one must ask how marketers compete. Accordingly.. in the sense in which it is something in the public interest. Technological change and innovation are the large levers of competition in industry.” Price Competition in the Oil Industry In order to assess competitiveness. and the entry of new competitors and new ideas. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. improving efficiencies. a universally acceptable definition of competitiveness is elusive. as competitors seek to attract market share through lower prices. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive). and ideally many entities offer the same or similar products (brand variety). provide some means for comparing the type and to some extent. Conditions for a competitive market can be deemed to exist when: • • more than one. or in other words. reducing costs. Simply put.Unlike many business or economic concepts. Price competition. the result of price competition is reduced profit. in order to maintain some level of brand variety. Since a competitive market effectively limits the price option. competitors can either restore higher prices or reduce costs. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. it can frustrate communication and obscure analysis. To achieve this. this usually requires a reasonable number of competitors. An effective functioning of markets also permits smaller competitors to expand if they meet the test. Inevitably. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. is the only real option in the long term. and unless care is taken to use the word precisely.

most Canadians relate more in terms of retail gasoline marketing.. 1960) 2 Although distinct. and in retail markets. 1971). where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. 4th Ed. and the downstream industry. Ill. or four P’s: Product. A refiner in Toronto may well compete with a refiner in Buffalo. New York. whose main activity is the exploration and development of crude oil. in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. It is also important to stress that the market ultimately sets rack and retail pump prices. Place. Irving. The converse notion that the industry establishes a “should be” margin. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. the geographic scale of competition is an important consideration. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. Basic Marketing: A Managerial Approach. and Promotion. and as will become more evident in this study. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. is false. in rack markets. Given the commodity nature of petroleum products. particularly in the crude (upstream) industry and refiner sector. the raw material from which gasoline is made. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. some organizations have operations in two or more of these markets. p. • Thus described. commonly known as the “marketing mix”1. Jerome McCarthy. Nevertheless. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. (Homewood. Within the broad context of the oil industry. MJ ERVIN & ASSOCIATES 7 . so a brief description of these. which in turn defines a proper market price. the “oil industry” consists of two distinct industries: the upstream industry. which in turn defines the margins. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. The dynamics of upstream and refiner competition are major studies in themselves. whose main 1 E. and are generally known as integrated oil companies. Price.: Richard D. In fact. competition in the crude and rack markets deserves some mention. and are beyond the scope of this study. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. the most effective of these as a competitive tool is price.44 (1st Dec.the variables at their disposal.

Crude oil is a commodity which is traded in a global marketplace. and the delivery and sale of these products to the consumer. its marketing operations). Although this industry is not the focus of this study. which it does on a continuous basis. consequently.the raw material from which gasoline is made. alongside major producing countries such as Saudi Arabia. While this study focuses on the downstream industry (and in particular. and in the open market structure that exists in Canada. Within the scope of this study. which finds and produces crude oil .activity is the refining of crude oil into petroleum products. from the exploration for potential crude or gas reserves. production. due to variables such as crude quality. Canadian producers have virtually no influence over world crude prices. MJ ERVIN & ASSOCIATES 8 . Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. it is probably sufficient to say that. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. in several commodities trading centres around the world. drilling. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. implying that it fluctuates. The upstream industry’s crude price is represented in Figure 1 as elastic. and transportation of crude oil to the refinery plant. gasoline grade. that is to say. Infrastructure The upstream oil industry encompasses a broad range of operations. In providing historical comparisons of crude to rack/pump prices. Canadian producers are known as “price takers” rather than “price setters” of crude prices. and refinery production methods. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline. as a minor contributor to the world crude supply. it is important to examine its relationship with its neighboring downstream industry. which gives an accurate portrayal of month-to-month crude price fluctuations. Canadian producers must compete to sell their production to refiners. rather than a fixed value. our crude prices rise and fall according to price benchmarks established far beyond our own shores.

buy refined products from the refiner and sell them to the end-use customer. diesel. day-to-day plant operations are cost-intensive. and hopefully realize some production. and from this feedstock. is the provincial government. and some attention to the refiner sector is therefore given here. heating fuels. which in oil producing provinces such as Alberta. put simply. drill for. and lubricants. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. and marketers who. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. oil producers must explore for potential reserves. is called the refinery. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. as a factor of the regular gasoline retail pump price.While some suggest that the price of gasoline should rise and fall exactly with the crude price. in the petroleum sector.1 cents per litre. crude is only one of several factors that influence pump prices. involving energy. was 19. The focus of this study is on the marketing sector of the downstream petroleum industry. manufactures a range of refined petroleum products including gasolines. MJ ERVIN & ASSOCIATES 9 . personnel. maintenance. A modern refinery is a sophisticated work of engineering. who manufacture petroleum products from crude oil. and pay out royalties to the resource owner. its predominant feature is the plant facility which. This sector acquires crude oil. and numerous safety and environmental safeguards. or roughly 34 percent of the pump price. From this revenue. As a general measure: Finding 2: 1996 average crude price. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. As is typical of many manufacturing organizations. In addition.

reflecting the cost of transporting the crude from the producing region to the refinery plant. they use rack price as their basis. The existence of rack price in a given market is not of itself. contract price . which provides an independent and objective determination of rack-based gross refiner margin. refiners sell their product under a variety of arrangements. While refineries are always rack price points. external measurement of the current market value of a particular petroleum product. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. there would be little or no market-driven competitiveness in the refiner sector.the price charged for immediate supply on an “as available” basis. as they relate to negotiated. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. but with no material effect upon the Gross Product Margin derivation. as this price point exists within the marketing sector. the gross refiner margin is elastic. and a return on the considerable capital investment in the plant facility. 2 MJ ERVIN & ASSOCIATES 10 . since the market-driven rack price provides an objective. In simple terms. the gross refiner margin is the price at which the refiner sells its refined product. many of which do not have integral refineries. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. For simplicity. only rack price information is readily available in the public domain. On a national basis however. In fact. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. less the price at which it bought its raw material2 (rack price minus crude price). Of these three refiner prices. This margin provides for plant operating costs as described above. 1 Dealer Price is not included here. Although contract and transfer prices are distinct from rack price. In fact the refiner typically pays a higher price than the benchmark crude price. and accordingly.this is the “internal” price charged by a refiner to the marketing arm of the same company. Wholesale volume data is not readily available on a market-specific basis. not the refiner sector. being squeezed or expanded between these two price points. which may cause Gross Refiner Margin to be slightly overstated.Price/Margin Model Elements For simplicity. this model only uses the benchmark crude value. Since both crude and rack prices fluctuate according to market forces. some clear competitiveness indicators exist. transfer price . For a competitive rack market to exist. Contract and transfer prices are not openly shared. indicative of a competitive wholesale rack market.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. the relative competitive strength of any given rack market is difficult to assess. representing major Canadian population centres. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. If for example. which can be broadly categorized as follows1: • • • rack price . confidential terms between the seller and specific buyers.

Integrated Refiner-Marketers In Canada. the question of the internal selling price. petrochemical producers. Canadian refiners must therefore be price competitive not only with each other. In practical terms.000 km) for overland truck transport. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America. for example. As shown in Figure 15 (page 35). With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. even overseas. The mechanisms that drive rack prices are more fully discussed on page 36. potential sources of wholesale product supply for most Canadian non-refiner marketers. market-driven Rack (wholesale) pricing of petroleum products. wholesale refined product is bought and sold across very large distances. integrated refiner-marketers establish transfer prices at. In practice. as there is no obvious market mechanism to regulate its setting. due to the relatively small transportation cost.for example. arises. 1 Based on Octane Magazine Retail Outlet Survey data. would produce better than expected refiner income. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). but where pipeline or marine fuel terminal facilities exist. but at the expense of marketing income. and which supply petroleum to about one-third of all retail outlets in Canada1. many US and European refineries are in practice. who compete for a share of this demand. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. most refiners also participate in the marketing and retailing of petroleum products. but with their US and European counterparts. market-driven rack prices. In examining the structure of the Canadian refiner sector.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . from any one of several regional refiners. The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. to so-called “independent” petroleum marketers. MJ ERVIN & ASSOCIATES 11 . who themselves do not refine petroleum products. or transfer price. in order to maintain realistic accountabilities within each of the two sub-sectors. or close to. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. and in the case of gasoline. In these cases of so-called “integrated” refiner-marketers. to major industrial consumers. this limits a marketer to a relatively short range (perhaps 1.

including mining. Wholesale Sales to a wide variety of customers. It is this sector which has direct contact with the petroleum consumer and it is this sector. as a popular and relevant “window” on the petroleum marketing sector. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. and aviation. Marketing operations within this sector can be broadly classified into three elements. farming. Within this industry sector. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. each with its own distinct infrastructure. For this reason. the most recognized element of the downstream oil industry. in the minds of many consumers. gasoline price and competitiveness issues attract considerable public. and purchase at or near the established rack price. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. or in the case of cardlock facilities. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. home heating. Retail Sales to the domestic motorist. principally into commercial trucking operators’ vehicles. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector. product is sold from a central facility. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. and who essentially deal directly with the refiner. trucking. • • MJ ERVIN & ASSOCIATES 12 .Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. media and regulatory attention. which “sets” the retail price of gasoline.

to the aviation fuel consumer. Sales of petroleum products through bulk sales outlets. and usually supply customers by delivery to the customer’s own storage tank. Sales to major industrial accounts. Sales to commercial and industrial accounts by the wholesale marketing sector. MJ ERVIN & ASSOCIATES 13 . heating fuel delivery is an integral part of a bulk sales outlet. by delivery tank truck. to the motorist consumer. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. Sales of petroleum products (principally gasoline) through retail gasoline outlets. Before examining this sector in detail. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary. There are over 1. which primarily serve long-disttance truckers and commercial delivery and haulage operators. These outlets usually have considerable inventory capacity. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. usually involving some aspect of the marketing sector infrastructure. Sales to spot buyers at posted rack price. Direct sales generally do not involve any marketing sector infrastructure. at a negotiated contract price. often delivered by pipeline or ship/barge. There are about 16. for example. There are over 850 cardlock outlets in Canada. in smaller centres. In major centres dedicated Home Heat centres provide this service. one final element of the pump price model must be reviewed. such as product transport and/or storage. Sales of aviation fuels at major and secondary airports across Canada. as discussed.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. and regular gasoline in particular. typically at the “rack point”.500 retail gasoline outlets in Canada.300 bulk sales outlets in Canada. according to the contractual relationship between the supplier and the dealer. which is generally less than the rack price. using delivery tank trucks. Sales to non-refiner petroleum marketers. as principal elements of petroleum marketing operations. Sales of home heating fuels to residential furnace oil customers. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. Retail outlets are operated in a variety of modes.

A three-cent drop in pump price. If the pump price decreases for example. stable amount. municipal taxes.2 cent (0. which amount to 28.6 cents per litre (Canada 1996 10-city average). The petroleum industry acts as a collector of these taxes. the tax content of retail gasoline in Canada has increased steadily over several years. As part C of this study shows. typically made up of: • • • • a ten cent per litre federal excise tax. PST). would include a roughly 0. tax content does fluctuate somewhat with pump price changes. regardless of market conditions. the tax content of the petroleum price is essentially a pre-determined. Table 2 shows the provincial tax content for retail gasoline. or roughly 50 per cent of the pump price. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues. provincial sales tax. 1 Due to the application of GST (and in Quebec. for example. this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. in a small number of markets. and seven percent GST. MJ ERVIN & ASSOCIATES 14 .3 in Quebec) drop in the tax content.

5 cents was introduced in the Montreal and surrounding area in 1996.0 3.3 27.9 3.6 3.0 10.0 10.0 15.0 10.0 3.8 note 1 note 2 An additional tax of 1.7 30.6 22.Table 2: Taxes on Regular Gasoline on December 31.0 27.0 10. An additional pump tax of 1.7 13.0 28.0 10.7 3.5 3. plus a 6.3 Federal Excise Tax 10.6 3.4 3.0 GST content (7% of pump) 3.0 10.2 24.3 10.0 11.0 10.6 25.0 14.2 24.5 14.5 6.2 10.6 3. All Quebec gasoline sales are subject to a 15.2 cent per litre pump tax.0 10. MJ ERVIN & ASSOCIATES 15 .7 18.0 16.0 4.3 20. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 cents is charged in the greater Victoria and Vancouver areas respectively.0 28.0 9.1 25.5 cents and 4.0 10.6 3.0 10.5% sales tax applied to the GST-inclusive pump price.5 12.1 32.0 10.5 Total Tax 24.8 4. Provincial Tax 11.0 10. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.

It also provides an overview of the industry in terms of several infrastructure parameters. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements. based on regular unleaded gasoline. including retail outlet distribution.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. this section provides a view of the Canadian petroleum marketing sector. This 1 Prices and margins reflect a Canadian 10 city average.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. Figure 2: 1996 Average Prices/Margins . namely the dealer’s costs and income. operating modes. MJ ERVIN & ASSOCIATES 16 .5 ¢ 0.3 ¢ 28.8 ¢ TAX 28.4 ¢ 19.5 cents per litre (after freight cost). some profit return for the shareholder. Refiner operations realized 5. and ancillary operations.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. and potentially. the brand supplier’s costs.3 percent of the average regular gasoline posted pump price.1 cents per litre. 3.1 ¢ 5.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.6 cents per litre. or 9 percent. or 50. and the retail gasoline sub-sector in particular. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).3 cents per litre. to derive a representative value for regular gasoline gross product margin in Canada. was available for product marketing operations.2 ¢ 24. or 34 percent of the pump price. The residual. Upstream operations realized 19.

was 3.5 cents per litre. three key findings can be stated: Finding 4: Finding 5: In 1996. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. Based on the 1996 data. The marketing sector then. and it is depicted in Figure 1 as a fixed cost element. for example) is sold/transferred at the current rack or transfer price. and is often out-sourced to third-party common carriers. was 5. The gross marketing margin. Freight cost does not typically fluctuate. Both refiner and marketing margins have been in decline over the past several years. the finished product (gasoline.3 cents per litre. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. Although many petroleum marketers conduct their own freight operations. In 1996. as part C will describe. this is seen as a “non-core” business. petroleum taxes accounted for 50. See page 10 for further explanation.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. Bloomberg rack price values were used as the assumed wholesale price. or “rack to retail” margin.3 percent of the average urban price of regular gasoline in Canada. and is then transported to the retail outlet. is usually the gas station. In referring to marketing margins and product margins. is the second of two elements of the downstream oil industry. In 1996. it falls into the domain of the marketing sector. is defined by the marketdriven price points of ex-tax pump price. and rack price. Freight MJ ERVIN & ASSOCIATES 17 . It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. As the product leaves the refinery plant. which in the case of retail gasoline.

freight.5¢ Product Operations Freight 0. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. as it excludes the “outside variables” of tax. petroleum marketers. This is a particularly useful measurement in comparing retail gasoline markets.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study. Gross product margin is therefore defined as gross marketing margin less freight cost. storing and dispensing a product such as gasoline adds considerably to the operating cost. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .1¢ Tax 28. and is therefore a poor comparative tool. as it represents 80% of all retail gasoline sales. which are typically close to a wholesale rack point. As represented in Figure 3. an average gross product margin for regular gasoline in a major Canadian city was 3. typical of any retail business.5 cents per litre in 1996.000 per outlet. Figure 3: 1996 Average Regular Gasoline Margins (56.6¢ Refiner Operations 5.3¢ 3. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). together with gas station dealers.costs are generally less than one-half cent per litre in most major Canadian cities. Posted pump price includes all of these variables. • Product sales: Within this domain.8¢ Pump Price) Upstream Operations 19. and upstream/refiner margins. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. Unlike most other retail enterprises however. incur a variety of costs. but at an average cost of over $200. rural markets experience higher pump prices than do larger centres.

This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. 1960) MJ ERVIN & ASSOCIATES 19 . This study does not examine such a broad issue however.44 (1st Dec.). Simply put. 2 E. and accordingly. Price. and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. marketers compete to be represented in as many and/or the best locations as possible. rather than the most places. 4th Ed. Ill.retail gasoline sales respectively1. one must ask how marketers compete. it represents a very small percentage of total retail petroleum sales. Today. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. and Promotion. seasonal blends. will ultimately purchase based on price. but in 1995 was typically 5 cents per litre for midgrade. 1 Diesel is another petroleum product sold at many retail outlets. Higher octane grades are more expensive than RUL.” or four P’s: Product. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. The grade differential varies somewhat from city to city. p. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. but most consumers view gasoline as a commodity. marketers have attempted with some success to differentiate their product offerings from other brands. Basic Marketing: A Managerial Approach. • Product In the past decade.: Richard D. etc. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. commonly known as the “marketing mix2. competitive strategy of this type focuses heavily on selecting the best place. a number of factors preclude this type of strategy. RUL prices are therefore most often cited when relating historical price trends. Irving. Place. additives. Place Typically. Although revenue from this product is factored into the study market economics in Part D. A portion of the market certainly responds to this type of competitive strategy. Jerome McCarthy.. page 24). expanded product/services offerings such as convenience items. as gas stations proliferated. Price competition has forced marketers to optimize outlet revenue. and 9 cents per litre for premium gasoline. and the price difference between these grades and the RUL price is referred to as the grade differential. propane vs. marketers compete for the consumer’s choice of transportation energy (for example. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. gasoline). or when comparing price levels between markets. In order to measure competitiveness. 1971). Today. (Homewood.

This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. As such. uniform prices . This study presents an extensive historical and comparative analysis of pump prices. fluctuating pump prices are a significant indicator of robust competition among marketers. and more importantly. this study examines the dynamics of price competition in considerable detail. • Price In most markets. due to the largely commodity nature of petroleum product.that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. probably due to its relatively high cost. Examples of promotional competition are: • • • brand identity gasoline discount coupon. • • • While examples of all of these indicators are abundantly in evidence. gasoline is viewed by consumers as a commodity uniform in quality and widely available. Promotional activity seems to have decreased in the past few years. In this context. and due to the already slim margins available to marketers. low prices and/or margins.contrary to some public perception. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. is less clear. volatile prices . in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. At its extreme. Examples are: • prominently displayed prices .while uniform pump prices are sometimes cited as evidence of industry collusion. their subsector margins. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. free item with purchase or special price item with purchase. caused by price competition. price has proven to be the most widely used competitive tool by gasoline marketers. Consequently. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. Promotion In the gasoline retailing sub-sector. volatile pricing manifests itself in the form of a price war (see below). MJ ERVIN & ASSOCIATES 20 . gasoline is a commodity. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions. and therefore “trades” within a relatively narrow price range.• • closure of non-viable outlets. Establishing an objective measurement of price as a competitiveness indicator however.

where the ex-tax pump price is equal to. are indicators of a competitive market. but to competitors. assuming that the rack price is unchanged. or when prices rise or fall apparently in unison. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. for example). While this support may take one of several forms. the effect on many consumers is immediate: they will drive into that station. or even being squeezed to zero . Whether through falling pump prices or rising rack prices. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. The effect of this upon the gross marketing margin is obvious: it is squeezed. This is a misconception. one must adopt the perspectives of both consumers and competing. Finding 7: Price uniformity and price volatility. the relationship between the supplier and dealer is generally as described on page 25. The other dealer has little choice but to quickly match. its effect is to restore some measure of the dealer margin. 1 This does not occur at company operated or commission outlets. who then react quickly to the change. To understand the phenomenon of uniform pump prices. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. competitors will likely match this price. In the case of lessee or independent dealers however. bypassing the higherpriced outlet. competitors may not follow. MJ ERVIN & ASSOCIATES 21 . or even less than. or even undercut the competitor’s lower price. If one dealer decides to reduce pump prices (by two cents. Price Support In times of “normal” pump prices. obviously at the expense of the supplier margin. in order to maintain a reasonable market share. gross product margin will eventually diminish to a point that is not viable for a majority of competitors.When pump prices are uniform. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. the wholesale rack price. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. Pump price signs are an ubiquitous feature of the retail gasoline industry. and provide to the dealer what is commonly referred to as price support. Pump prices therefore tend to move uniformly within a very short time. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. the supplier may temporarily intervene. since they too must restore their gross product margins to sustainable levels. adjacent dealers. facilitated through street price signs. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. When this occurs. in an attempt to gain market share. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin. since there is no “dealer margin”. If the posted price increase is too high.

Following a year-long investigation. 1997 MJ ERVIN & ASSOCIATES 22 . Price maintenance: where a supplier exerts upward influence on prices upon a dealer. These cases have largely involved local dealers and/or isolated incidents. provincial and even municipal levels. the Bureau found that there was no evidence to support these allegations1. but reverts back to the dealer when the support arrangement is ceased. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. In addition. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. In addition. There are few current examples of direct government intervention in the pricing of petroleum products. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. and a brief discussion of this case appears in part D. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. however. or of direct government intervention in marketing. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. control over retail pump price effectively reverts to the supplier. is beyond this study’s scope. resulting in 9 convictions. An examination of the effect of the Competition Act. the petroleum marketing sector has been the subject of several inquiries at federal. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act. which is administered by the federal Competition Bureau (Industry Canada). Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. A review of historical retail pump prices in the Halifax. More recently. While this study does not intend to undertake a detailed review of the effect of the Act.Under the provisions of some price support mechanisms. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”.

500 retail gasoline outlets across Canada.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. MJ ERVIN & ASSOCIATES 23 . So defined. but exist to meet other important societal needs. A practice. and is the single largest market for gasoline products. accounting for 41% of all petroleum demand. and consequently. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). that is. in the form of standards for the decommissioning of retail petroleum sites. entry into an attractive market. Many smaller retail owner-operators. promotes or limits market-driven pump prices. The high cost of building a modern retail gasoline outlet for example. for safety and environmental protection. As a product group however. higher pump prices. as outlined above. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. particularly in smaller population centres. creating a need for higher margins. Conversely. accounts for about 37% of all refined petroleum demand in Canada. It is important to acknowledge that many regulations affecting the retail gasoline industry. sales of gasoline through the roughly 16. or incentive for. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. creates an obstacle to. or inhibiting. it is clear that government policy plays an important role in facilitating. inhibit competition. This issue is discussed more fully in part D. it is the single largest one. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. a competitive climate. exit from an non-viable market. is in part. Retail gasoline sales. one can cite examples of regulatory obstacles to exit from the retail gasoline market. These regulations clearly exist to the benefit of all. to some degree. or incentive for. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. and at least some of this capital cost is regulatory compliance-driven. accounting for roughly 88% of all gasoline demand.

452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey. This survey accounts only for major established retail networks . as shown in Figure 5.it has no practical means to enumerate each and every outlet.2% Asphalt/Coke 4.9% PetroChem Feedstocks 5.9% Diesel Fuel 22.7% Light/Heavy FuelOils 14.2% Propane /Butane 2.7% Lube/Grease 1.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6.2% Other 0. Figure 5: Canadian Retail Outlet Population .1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 . This study provides an estimate of the actual retail outlet population.3% Total Sales Volume: 84.6% Other Gasoline 4.2% Retail Gasoline 37. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.

Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . and this is of some importance with respect to the matter of prices and competition in this sector. to about 16. using Octane counts only) is roughly equivalent to population densities. who manages the day-to-day operations at the retail outlet. who holds initial title to the refined petroleum as it leaves the rack point.000 outlets in 1989. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. as owner of the product. The supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14. and usually owns the brand name seen at the retail outlet. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode.The estimated number of retail outlets in Canada has declined from 22. exist between retail dealers and their suppliers. as one might expect. Several possible relationships. and all inventory and revenues belong to the supplier. controls the setting of the pump price. Distribution of these outlets by province (Figure 6. The principal dealer and attendants are salaried employees of the supplier.500 in 1995. and the dealer.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. the retail outlet is owned and operated entirely by the product supplier. or modes.

usually based on cents per litre of petroleum sales. based on pump sales volume. but the outlet operator (“dealer”) is compensated by a commission payment. The “dealer” is in essence. The dealer in turn hires attendants. Since the supplier owns the petroleum product at this type of outlet. who pays all outlet operating costs. Control of Pump Price Dealer Compensation supplier a commission from the supplier. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode.the entire gross product margin accrues to the brand supplier.sub-component margins . the outlet facilities and petroleum inventory is owned by the supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. the supplier retains control of the retail pump price. the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 . an employee of the supplier supplier supplier typically the dealer. and pays them from his commission revenue. supplier salary from supplier.

product from the supplier at a “Dealer Wholesale” price. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists. and means of compensation supplier. and in turn resells to the motorist consumer at a higher pump price established by the lessee. can vary considerably from one supplier to another. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. unlike rack or pump prices. The dealer pays most or all of the expenses associated with operating the outlet. The margin between these two prices is the dealer’s gross revenue. not the supplier. since it is predicated on contractual arrangements between the dealer and the supplier. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. MJ ERVIN & ASSOCIATES 27 . and sells at the posted pump price. This dealer margin is defined as the pump price (ex-tax). who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. and has control over the retail pump price. The margin between these two prices is the dealer’s gross revenue. the retail facilities are owned by the dealer. This Dealer Price. dealer-established retail price. and sells at the posted pump price. less the Dealer (wholesale) Price charged by the brand supplier. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher.

during a price war) as previously described. Petro-Canada. Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1. The remainder represent one of over 50 different marketer organizations. or Imperial Oil). and fully two-thirds operate as lessees or independents. 1 Unless the dealer is under a price support arrangement (for instance. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. some general figures are mentioned here. virtually none of the major integrated outlets are company operated. MJ ERVIN & ASSOCIATES 28 . This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace. In addition. who themselves establish pump prices. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study.

Many outlets have more than one ancillary offering: many “flagship” outlets for example. these study findings show that this can vary widely from market to market. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. and is a result of. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. These improved outlet throughputs have provided for improved petroleum revenue potential. feature both a large-area convenience food store and a modern car wash facility. more fully described in part C. which in part has led to a reduction in retail product margins.While an average outlet throughput may be in the order of 2. Most ancillary services are operated by the dealer/lessee.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. In effect. has had a profound effect on the retail gasoline marketing sector. In fact. Improved outlet revenue from ancillary operations has caused. average annual throughputs ranged from under 1 million litres in smaller population centres. Based on a sampling of outlets surveyed in this study. Canadian throughputs have dramatically improved in the past several years . ancillary service has had the consequence of subsidizing the pump price of gasoline. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. Figure 8 depicts the Canadian representation of several key ancillary services.5 million litres. Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . to over five million litres in major markets such as Toronto. reduced petroleum margins.

as can be seen in part D of this study. would be somewhat higher. using a Canada 10city weighted (by provincial demand) average. including smaller markets.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. Since 1 Data is not regularly collected on smaller markets. As such. prices are for regular unleaded (RUL) gasoline. While some of the presented findings are selfexplanatory. the “Canada average” price reflects an average of urban markets only1. an examination of the specific historical record of gasoline prices is useful. This shows that pump prices have increased in nominal terms. Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. many utilize terms which are explained in part A. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. This part examines broad trends in several areas. and with which the reader should be familiar. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price. Since rising prices are common to most consumer goods and services. particularly around 1990. Unless noted. when the Persian Gulf War caused crude prices to increase significantly. MJ ERVIN & ASSOCIATES 30 . An “all markets” average. Regional and market-to-market comparisons are presented in greater detail in part D. mainly using Canada average values.

1990. Figure 10: CPI Index Comparison . and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995. nominal pump prices decreased. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. and relative crude cost. In constant dollars. MJ ERVIN & ASSOCIATES 31 . It also depicts the associated margins. When pump prices are reduced by the amount of tax content. Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. as defined in part A of this study. retail pump prices were about 7 cents less in 1995 than they were in 1986. ex-tax equivalent prices. rack price. When compared to other consumer goods. as in Figure 10. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs.

are principally a reflection of changes in the underlying price of crude oil. If. and have risen slightly since 1994. Margin History While Figure 11 provides an indication of key price trends. then one might expect margins to be quite constant over time. which are defined by the price points. as Figure 11 shows. and the rise in the tax content. In fact. the downstream industry operates on a “cost-plus” basis. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. nor do rack prices exactly follow crude costs. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. as the next section shows. that is. as shown in Figure 12. the presence of these additional market factors have operated to the benefit of consumers. MJ ERVIN & ASSOCIATES 32 . it is also useful to examine the behavior of margins. it simply passes on a fixed cost margin to determine the “correct” pump price. due to additional market factors which affect pump and rack prices at any given point in time. Figure 12 shows that industry margins have not been constant over time. and in fact have displayed a declining trend over the past six years. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. It is important to state that pump price changes do not occur in exact lock-step with rack prices. which in turn. as might be suggested.

crude) 5¢ Marketing Margin (retail . since the chart is based on monthly averages. not weekly or daily data. the gross marketing margin can fluctuate quite significantly1. several factors. This shows that on a monthly basis. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. MJ ERVIN & ASSOCIATES 33 . while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. A more thorough discussion of specific market factors for these and other centres appears in part D. and has been a result of. which have both shown a consistent decline throughout the period 1991 to 1996. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Finding 13: From 1991 to 1996.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. the actual fluctuation is much more pronounced than shown. compared to the Canadian average. In particular. this upward trend is not attributable to “downstream” refiner or marketing sector margins. as local competitive factors act to self-regulate pump prices. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. The decline in refiner and marketing margins has both resulted in. 1 In fact.

On an ex-tax basis. US pump prices. Canadian pump prices have been roughly equal to. This shows that.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. with and without tax. A comparison of Canadian and US regular gasoline pump prices. This difference accounts for most. resulting in significantly higher Canadian gasoline prices. or even less than. although Canadian pump prices in urban markets are clearly higher than in the US. this is wholly attributable to the difference in taxation.Figure 13: Monthly Gross Marketing Margins. if not all of the difference in pump prices between Canada and the US. US Price History The retail gasoline tax structure in Canada is vastly different than the US. Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . is presented in Figure 14. for several years.

Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts. Figure 15 compares these values for selected Canadian and US centres over a period of several years. trading at any given time within a relatively narrow (about 2 cents per litre) range. have improved considerably. both a cause and an effect of improved throughputs and ancillary revenues as previously described. RFG has not been introduced to Canadian markets. Canadian outlet throughputs (although likely still less than those of the US). as a result of outlet closures (see Figure 5. While these trends have also occurred in the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. This is no longer the case however. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. • Although this study shows that on an ex-tax basis. Prior to 1994. behave in a very similar fashion. which is reflected in US average pump prices. This would be a useful area for further research. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. and moving up or down more or less in unison. From this it can be seen that Canadian and US rack prices. Canadian ex-tax pump prices were historically somewhat higher than in the US. page 24) and somewhat increased demand.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. when compared on an ex-tax basis.

and prices tend to fall. but in fact across the North American continent (US demand follows a similar pattern).500. Gasoline price exhibits a similar.900.000 34¢ 2. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.000 2.000 2. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense). any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America. Figure 16: Monthly Demand vs.000 2.000 24¢ 1. Yet in the latter half of each year. compared to average ex-tax regular gasoline pump price for the same period. Demand vs. and as would be expected in any commodities market under these conditions. a “buyers market” develops. albeit less distinct pattern. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.000 1.700.500.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.700. Price History Figure 16 shows the history of Canadian gasoline demand. of motor gasolines from 1991 to 1996.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg.100.000 2.300. or indeed anywhere. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 . conditions begin to favour a “seller’s market”. Gasoline demand exhibits a very regular seasonal pattern. the price tends to be bid upwards. Simply put. as demand ebbs and inventory improves. or sales.000 1. Pump Price (nominal ¢/litre) 3.900. not only in a given market. rising and falling closely in step with demand. As non-refiner marketers attempt to secure a supply of this diminishing inventory.100. increasing significantly every spring. and falling in the latter half of each year.

and product taxes which add to the consumer price of gasoline. Figure 16 shows that from 1991 to 1995. All of the findings suggest that. which ensures a competitive product price for buyer and seller alike. the essence of a free market economy. has operated in a highly competitive environment. as evidenced by declining industry margins. which consists of the refiners and marketers of gasoline and other petroleum products. Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. despite a rise in demand.3%. their related product costs and margins. while average ex-tax pump price declined by 14% (since 1994. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. demand rose approximately 8. MJ ERVIN & ASSOCIATES 37 . and this is clearly demonstrated in the case of gasoline prices on a seasonal basis.Whether in the spring or the fall. This part of the study presented a number of historical views of retail gasoline prices. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. pump prices have increased due to a significant rise in crude costs in this period). in that prices have fallen. gasoline prices have not followed the traditional model. the downstream petroleum industry. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. The traditional supply-demand model predicts that when demand rises. This is of course. On a long-term basis however. a feature of most marketregulated commerce. competing to meet their own needs. while world crude prices and Canadian taxes have generally increased over the past several years. so do prices.

and in order to provide insights into the range of competitive dynamics that may exist. margins and related implications for market competitiveness than can simply be provided by existing public-domain data. These “outside factors” tend to obscure the more relevant aspect of pump price. and pump prices alone provide very little opportunity for “comparability”. A number of factors such as taxes. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. namely product margin. MJ ERVIN & ASSOCIATES 38 . but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres.. freight. • Methodology Selection of Markets A number of markets were selected for the study.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. Nineteen markets were therefore adopted for the study (Table 3). is useful in providing broad overviews of industry price and margin trends. although one was subsequently dropped due to insufficient submitted data. outlet volumes. there is no regular monitoring of pump prices in smaller centres. ancillary revenues. play a role in a market’s pump price. so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. outlet costs. and a more detailed examination of price. etc. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them.

or “rack to retail” sector. In addition.and consequently competitiveness .are influenced not by one. Suncor Inc. Furthermore. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets. the gross marketing 1 Although White Rock is clearly not a major centre by itself. MJ ERVIN & ASSOCIATES 39 . it was essential to obtain data not normally available through existing public sources. price history data not available through public sources. retail pump prices .0001. retail outlet and brand representation. but a number of variables. and for smaller markets. and Group B markets less than 500. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets.Each market was classified according to regional affiliation (BC/Prairie. these organizations provided market-level data on freight costs. In all.. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. the gross marketing margin must be examined in isolation from those other variables. Process Overview As illustrated in part A. Five companies responded to this request: Imperial Oil. To examine the competitiveness of the marketing.000. 2 Depending upon the outlet mode. To this end. Shell Canada. Ontario. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. and Canadian Tire Petroleum. Petro-Canada. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500.

Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). 1 Although outlet cost and ancillary revenue data was not available for all markets. Finally. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. a market-by-market profile of outlet income is presented. tax content. average pump prices are higher than actual average regular gasoline prices. including some smaller centres. average outlet annual throughput was determined for each market. 1995 average values were determined for pump price. by product grade. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. 3. and freight were successively removed from the pump price. weighted by sales demand. rack price. Using the derived gross product margins and volumes for each market. 2. to arrive at “blended” values2. Where differences in gross product margin might still exist. Where applicable. For each market. a broad representation of markets was possible. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists. This allows for an accurate determination of net outlet revenue.margin is stripped of its freight component. The gross product margin thus serves as an interim basis for comparing study markets. From participant company supplied data. and the final “rationalized” gross product margin was determined for each market. and freight. Group B (smaller market) and 19-market study averages. these were weighted by volume. rack price. The variables of tax content. in addition to operating cost and ancillary revenue data gathered in the study1. to derive the 1995 average gross product margin for each of the study markets. 2 Accordingly. MJ ERVIN & ASSOCIATES 40 . as the “blended” price includes other product grades.

also considering that RUL constitutes the majority of product. it is important to understand that the use of rack price in this analysis has certain implications. The derived weighted average values of pump price.4. and supplier profit. petroleum revenues. Also. or consolidated net incomes. 6. 5. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain.. average revenues from ancillary services were added.. and therefore where assumptions were made. When these margins are applied to outlet throughputs as in step 4 above. but they are relatively minor.7 million. a recognized source of data on world crude oil and petroleum markets and prices. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. represent a broad range of markets. objective data exist for both of these values.. etc..to determine average consolidated net revenue per outlet. and gross product margins are therefore likely to be understated. grade differentials were based on known differentials of nearby markets. Supplier Overhead costs. these 19 markets represent a combined population base of 8. 7. and from one brand to another. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. . the effect on the “blended price” is small. MJ ERVIN & ASSOCIATES 41 . This value was then applied to the gross product margin to determine average outlet petroleum revenue. product margins. accurate comparisons are possible. From participant company data. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. Unlike retail pump prices however. freight. as described on page 10. and outlet operating costs were deducted from total revenue. A dollar-per-outlet estimate of these elements was made. Wholesale refined product prices used in this study are therefore likely to be overstated. This variation is constant across all nineteen markets however. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. including relatively smaller ones such as Sioux Lookout or Gaspé. Bloomberg rack price values were used as the assumed wholesale price.. so that on a cents-per-litre basis. perhaps by 1 to 2 cents per litre. marketing margin. Interpretation of Data In some smaller centres. many wholesale petroleum purchases are made at less than the “posted” rack price. While clear. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets. In referring to marketing margins. encompassing a significant portion of the entire Canadian market. and accordingly represent a broad spectrum of consumers and marketers. These differentials do vary from one market to another.

MJ ERVIN & ASSOCIATES 42 .64 cents per litre in pump price.38 cents per litre in ex-tax pump price. higher priced markets are associated with smaller population centres.8 cent difference in pump price 1 See footnote at Appendix II. but a variance of only 12. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. The data also shows that typically. table J for an explanation of how variance is derived. and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. Tax Figure 19 shows posted pump prices for the study markets. independently gathered data. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. there is little to suggest why such a high variance exists. broken into tax and extax components. The first of these variables to be examined is tax. The study data suggests that variations in tax rates account for a significant part of pump price differences. The data shows a statistical pump price variance of over 17 cents per litre within this study group. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets.Rack prices used in this study are nevertheless market-driven. while lower prices tended to prevail in major centres. The 19-market study group exhibited a statistical variance1 of 17. A 6. and based on objective. accurate.

As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. provincial tax rates can vary greatly.less than one-half cent per litre. as described in part A. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. Upstream and Gross Refiner Margins Although the deduction of tax content is useful. or when examining historical price trends.75 cents per litre (Vancouver. was less than three cents. Montreal). accounting for roughly half of the average retail price. taxes were a significant element of pump price. while taxation between provinces is more pronounced .between Calgary and Vancouver for example. additional elements of the revenue stream must be further isolated. namely the upstream industry and refiner sector. MJ ERVIN & ASSOCIATES 43 . but the variance is minimal . This eliminates any effect that tax variability may have. Figure 19: Pump Price . the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry.tax. In all study markets. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry.while all markets are subject to the same rate of federal excise tax and GST1. when examined on an ex-tax basis. it is therefore more useful to use ex-tax pump prices when comparing any two markets. 1 Due to pump price differences. thus providing a better basis for comparison. GST content can vary by market. The data shows that taxation between markets within the same province varies little.

as this would cause rack buyers to bring product in from the lower-priced region . When rack price is deducted from the ex-tax pump price. the rack price is equivalent to the upstream margin plus the refiner’s margin. Freight costs are additional. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. reflecting some differences in refinery crude acquisition costs.assuming transport costs did not outweigh the price difference. the validity of analyzing gross marketing margins in isolation might be raised. rack price) and gross marketing margin elements. one region cannot maintain rack prices at a higher level than another. and their respective margins. rack and pump prices. in the case of Thompson). To address this. differ little from those of major centres. Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. but ultimately. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. if a clear understanding is to be achieved. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. it should be restated that each of these sectors. the rack price is set at the rack point (Winnipeg. as is examined below. reflecting the reality that at the rack level of competition. are clearly delineated by market-driven crude. and therefore are best analyzed separately. This is due to the fact that for any market.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. Furthermore. MJ ERVIN & ASSOCIATES Cents per litre 44 .

this freight cost is almost negligible. Before using this as an analytical tool however. Although freight operations are often an integral part of many petroleum marketing operations. as low as 0.0 cents per litre. it is essentially a “non-core” business. remote population centres. Figure 21 shows a study market comparison of gross marketing margins.49 cents per litre (gross product margin). one final outside variable must be isolated: that of product freight. in fact. MJ ERVIN & ASSOCIATES 45 . generally smaller markets. and therefore a significant pump price factor. It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. Two of the study markets had freight costs in excess of 3. with their component freight costs. For other. For markets which are also established as rack points. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. To provide a comparative view of the marketing dynamics within the study group.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. it is therefore important to eliminate the freight variable from the gross marketing margin. particularly in comparisons of major urban markets to small. resulting in comparative gross product margins.16 cents per litre (gross marketing margin) to 7. the data shows that freight is often a significant part of the gross marketing margin.3 cents per litre. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences.

22 cents per litre Smaller markets showed a wider variance in gross product margin .06 cents per litre.5 cents per litre average Gross Product Margin cited in Part B.6 cents) to the variance in their component gross product margins (7. Bloomberg rack price values were used as the assumed wholesale price. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3. or between any two regions. Group A (larger population) markets averaged 5. The study revealed that: • • Retail gross product margins differ very little between major urban markets .5 cent per litre average relates to regular gasoline in major markets.6. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.17 cents per litre. as the 3. 1995 gross product margin averaged 5. to the resultant retail gross product margin . Gaspé. at 3. at 14.5 cent variance in gross product margin is still significant however. was the lowest.a variance of only 2. was the highest of the study group. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17.68 cents per litre1.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market. A 7.5 cents). MJ ERVIN & ASSOCIATES 46 . petroleum revenues. product margins.68 cents per litre.the gross revenue available to the petroleum marketing sector for its operations.95 cents per litre. In referring to marketing margins. For all study markets. while Toronto. or consolidated net incomes. while Group B markets averaged 7.42 cents per litre.

000 Litres 3.000. a wide range of variability still exists between markets in the study group . 3.1 cents per litre in Toronto.000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that. vs.000. it would likely be so unprofitable as to be un-viable. once isolating retail gross product margin from all of the “outside” pump price factors.14.000. ranging from under 700. If these two factors are related to each other as they are in Figure 24.differences between markets.000 4.000 litres per year (Sioux Lookout) to over 5. A wide range of volume performance is evident. Indeed.000.000 1. Figure 23: Average Annual Throughput per Outlet 6.000 5. sold significantly less than 5 million litres of petroleum per year.000 litres per year (Toronto). an examination of related outlet throughput volumes is necessary. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group.000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets.000.2 cents per litre in Gaspé. for example. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 .000. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000 2. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. if any retail gasoline outlet located in the Toronto area for example.

7 million respectively.000. the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput. Smaller markets perform as competitively as larger centres.6634Ln(x) + 76. Regionally. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.that is. With few exceptions.000 Volume (litres) 4.4 million litres annually. Ontario. the Group A market outlets had roughly 50% more throughput than Group B outlets . not of poor competition.42 cents) than smaller (Group B) population centres (7.000 2. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes.000. they remain essentially the same regardless of volume changes .000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin.6624 1.962 R2 = 0. all market groups (BC/Prairie. On average however. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.000. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet. while those with high Gross Product Margins tend to have low outlet throughputs.000.000.000 6.000.95 cents). If all outlets in a given market experience generally low throughputs. As most outlet operating cost are fixed in nature .000 3. compared to 2. it follows that higher gross product margins will be the consequence.Figure 24: Outlet Volume vs. Although MJ ERVIN & ASSOCIATES 48 .000 5.

supplement their incomes with other revenues.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences.the revenue available for dealer income. as described below. such as convenience stores. averaged $69. in addition to petroleum sales. and the resultant consolidated net revenue. and must be examined. These additional factors clearly have an effect on the relative competitiveness of retail markets.000. Consolidated Net Revenue per Outlet To create a complete. is only a measure of petroleum revenue per litre. and auto service. and incur many expenses in the course of their commerce. and ultimately shows that very little difference in competitiveness exists between any two markets. outlet-based view of retail markets. car wash.000. product cost. It represents the residual revenue which is available to the dealer and to the supplier. Gross product margin.000 3. competitiveness occurs between retail outlets. Figure 26 summarizes total outlet petroleum sales. ancillary sales.000 6.716 .000.000. however. which for the study group. two additional factors are introduced: ancillary revenue and outlet operating costs. In reality. less outlet costs. this is likely due to the higher incidence of Group B study markets within this region. while operating costs are those costs which are directly incurred in the operation of the retail facility.000 2.000 5. which.000.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. and supplier MJ ERVIN & ASSOCIATES 49 .000. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). Ancillary revenues are those derived from non-petroleum sales sources. supplier overhead costs.000 4. Figure 25: Outlet / Volume Relationship .

Costs.000 $250. reduced pump prices.000) $(150.000) $(350.000 $100. these ancillary operations contributed to a lower product margin and consequently.profits. In effect. Most markets showed relatively similar net revenues (see Appendix II.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. as explained below. Table K). Income BC/PR $300.000) $(300. A discussion of the ultimate distribution of this revenue is useful.000) $(250. causing the weighted average for Quebec / Atlantic to be depressed). As described above. Figure 26: Outlet Revenues. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000 vs.000 $150.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50.Group B outlets were not as profitable as these revenue values might suggest. although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue.000 $200.000 per year respectively .000 $50. Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . and his personal labour investment. $60.000) $(200. Finding 19: Based on published rack prices. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer.$154. MJ ERVIN & ASSOCIATES 50 . The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations. An examination of these component elements reveals a significant finding: that for most markets. which reflects his investment in the outlet. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000) $(100. petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

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Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

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Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

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Geographic / Supply / Freight cost considerations: As a port city.Vancouver population # of brands # of outlets outlets per 10. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high. and with access to wholesale product by several means.38 ¢ 7. net outlet revenues were less than those of other major centres.ex tax Canada Average .968 litres 7. Vancouver provides several perspectives into retail marketing. this market has access to numerous refiners along the Pacific coast through marine supply.60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. as described below. Low consolidated net revenues may have contributed to the higher margin.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Vancouver is also a terminal for a refined products pipeline from Edmonton.000 1. contributing to a higher than average pump price. while average throughput ranked 4th. Influence of other markets: Although relatively close to the US border.000 barrel per day plant located in the greater Vancouver area. This may explain the somewhat elevated gross product margin in this market. Vancouver collects a 4 cent per litre municipal tax. Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. and also has local refining capacity. Overall. but well within a cluster of markets with similar throughputs. Figure 28: Vancouver .Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price .745 18 446 2. a 60.542. The somewhat high margin placed this market slightly above.98 ¢ 0. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs.extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 . ranking 11th.658.

prices. MJ ERVIN & ASSOCIATES 55 .000 16. thus providing some unique characteristics for the market study.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC.45 ¢ 7. Despite its relatively small size. gasoline “cross-border shopping” is less pronounced than might be expected. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip.315 4 8 4. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver.White Rock population # of brands # of outlets outlets per 10. or competitive dynamics. Freight costs were accordingly low compared to other small markets in this study. In all respects. adjacent to the United States border. White Rock’s margin was typical of markets with similar outlet throughputs. Like Vancouver. White Rock is essentially part of a major market due to its proximity to Vancouver. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. This is likely due to the fact that unlike many smaller markets. Geographic / Supply / Freight cost considerations:. This suggests that.630 litres 7.604. this market is subject to a 4 cent per litre municipal tax. the White Rock retail gasoline market displayed the same attributes as a major urban market. This market is close to its usual rack point. prices in this market have historically mirrored those of Vancouver.98 ¢ 0. Price history / Taxation: Although no specific data is available. and retail gross product margin was less than that of markets with a similar population base. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. due to its proximity to one. Average outlet throughputs were relatively high. the study data found little to suggest a material effect upon representation. Vancouver.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. at least in this market. but less than most markets with a small population base. Influence of other markets: Although this market is a border-crossing community.

Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. Figure 29: Calgary . Rack-to-outlet freight costs are among the lowest in the study group. Influence of other markets: Calgary is fairly remote from US and other major markets. Some smaller markets in the vicinity have occasionally priced below Calgary.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada. Consolidated net revenue: was typical of other major markets in the study group. creating some competitive pressures (see Nanton).Calgary population # of brands # of outlets outlets per 10.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Calgary is of sufficient size to support a viable rack market.ex tax Canada Average .000 710. Other considerations: Of the markets studied.827. indicative of a strong competitive climate.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price . which was one reason for selecting Calgary as a study market. Price history / Taxation: As the figure below shows. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price.675 27 313 4.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.719 litres 6. Calgary had the third highest number of retail brands. Product is usually sourced from Edmonton refineries via pipeline.47 ¢ 0. pump prices in this market have historically been well below the Canadian 10-city average.24 ¢ 6. This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis. Calgary pump prices are very close to the Canadian average. Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Indeed.

margins and throughputs were typical of other markets with a similar population base. Ex-tax prices are also above average. and is therefore a recognized rack pricing point. this market is removed from other significant markets. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets.000 179.089.21 ¢ 7. Regina was of some interest as a study market.Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price .extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Influence of other markets: Like Calgary. and a history of volatile pump prices. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. supply/demand is likely more balanced. This is partly due to provincial taxation levels. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. Since 1993. which are among the highest in Canada. Figure 30: Regina . and therefore experiences no particular influences from any other major market.Regina population # of brands # of outlets outlets per 10.794 litres 7. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group. and this market is now more typical of other large population centres. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.50 ¢ 0. Although no supporting data is available.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Consolidated net revenue: was typical of other similar markets. Since then. it is likely that this reflected a surplus of wholesale inventory within the local market or region. Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.180 15 86 4.ex tax Canada Average . price volatility has eased.

this market has exhibited relatively stable pricing. like most markets of this population density. prices have tended to stay somewhat above the Canadian average. although there is no study data to support this. On an ex-tax basis. probably related to a regional surplus of wholesale inventory (see Regina).Winnipeg population # of brands # of outlets outlets per 10. and therefore experiences no particular influences from any other major market. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market.265. and has remained very close to the Canadian 10-city average.06 ¢ 0. Influence of other markets: Like Calgary. Consolidated net revenue: No ancillary or outlet cost data was available for this market. it is an established rack price point. possibly due to modest ancillary revenue.000 616.ex tax Canada Average .extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 .84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable. this market is removed from other significant markets. Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs. Price history / Taxation: In the early 1990’s this market experienced some price war activity.22 ¢ 7. Figure 31: Winnipeg . Since then. This may reflect a lower than average Consolidated Net Income.790 17 261 4. although.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . though somewhat higher than average ex-tax pump prices.217 litres 8.

Nanton had the second lowest gross product margin of the study group. Influence of other markets:.far in excess of what would be expected of a community with a population of 1. while others experience consistently high prices.000 litres 5. situated on a major North-South highway to the United States Among the study group.the highest of the entire group .Nanton. While these conditions would normally result in a high gross product margin. placing Nanton well below the expected margin. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Nanton had a high number of per capita outlets . Average outlet throughputs were relatively low. and perhaps healthy ancillary sales associated with highway traffic. would have an offsetting effect. in terms of expected petroleum revenues. MJ ERVIN & ASSOCIATES 59 . Despite its small size. Due to its highway location and its proximity to Calgary. Nanton was perhaps the least viable market in the study group. Consolidated net revenue: No Ancillary or cost data was available.91 ¢ 0. due to its proximity to one.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. the Nanton retail gasoline market displayed the same price attributes as a major urban market. This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market . a feature not available to other. Margin/Throughput relationship (Figure 24): Like some other small markets in the study group.600. in order to maintain a share of the considerable potential sales revenue that passes through this market. Price history / Taxation: In order to attract market share beyond simply the local population.41 ¢ 5. it is likely that low operating costs. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Alberta population # of brands # of outlets outlets per 10.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary. Nanton has traditionally priced either at or below Calgary. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. although not as low as expected. Nanton appeared to benchmark its pump prices to those of Calgary.and a low average outlet throughput. more isolated small-town markets. In this respect.585 4 5 31. as Figure 24 shows. this market has a relatively low freight overhead. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable. the retail gasoline market in Nanton was not restricted to the local population. Unlike many of the smaller markets in this study group.000 1. Nanton was the smallest market in terms of population.071.

Alberta population # of brands # of outlets outlets per 10.000 6. high pump prices. Peace River also experiences high freight costs.Peace River. other markets. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. Geographic / Supply / Freight cost considerations: At 1.623 litres 12. and was accordingly chosen as a study market.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Peace River has among the highest freight cost in the study group. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. isolated markets.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply.45 ¢ 1. this market has little or no influence upon. they were comparable to other markets with similar average throughputs. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. Supply is via tanker truck from Edmonton. experiencing relatively high gross product margin and consequently. its normal rack point. further adding to overall high pump prices. In contrast to Nanton. Price history / Taxation: Peace River is typical of small.6 ¢ 10. isolated markets. nor is it influenced by. Influence of other markets: Since it is not located on a major inter-urban thoroughfare.6 cents per litre.715 6 8 11.157. and due to its isolated locale in northern Alberta. MJ ERVIN & ASSOCIATES 60 . and in fact fell into a tight cluster of four other study markets. though fairly typical of many smaller.

resulting in per-outlet petroleum revenues which were quite typical of many markets. they were comparable to other markets with similar average throughputs. thereby creating the potential for narrower margins. Thompson is among the highest freight costs in the study group. Other considerations: Like other small markets. and due to its isolated locale in northern Manitoba.02 cents per litre.014. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. Manitoba population # of brands # of outlets outlets per 10. a significant portion of which would likely be distributed towards supplier overhead costs.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. outlet costs were also modest typical of most smaller markets. further adding to overall high pump prices.1 ¢ 3. It also experienced high freight costs. MJ ERVIN & ASSOCIATES 61 . Thompson is faced with the dilemma. this market has little or no influence upon. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. high pump prices. its usual rack point. and in fact fell into a tight cluster of four other study markets.000 14.520 litres 14. This however. Price history / Taxation: Thompson was typical of small. remote market. Influence of other markets: Since is not located on a major inter-uban thoroughfare.975 5 6 4. Geographic / Supply / Freight cost considerations: At 3. Consolidated net revenue: Low outlet throughputs were offset by higher margins. and reduced pump prices. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. These factors resulted in relatively strong per-outlet net revenues. the community of Thompson clearly falls into the category of a small. isolated markets. other markets. experiencing relatively high gross product margin and consequently. Supply is via tanker truck from Winnipeg. Although outlets in Thompson appear to be as competitive as those of any other study market. Although ancillary revenues were the smallest of the study group.Thompson. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. nor is it influenced by.02 ¢ 11.

and first in average throughput per outlet. this market ranked first in a number of measures: lowest gross product margin. Influence of other markets: This market is continuously linked with several other major retail markets. thus there exists a climate of robust competition. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres. Consolidated net revenue: Although no study data was available for this market.098.extax Toronto Posted Price .4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5. it is likely that outlet ancillary revenues are among the highest in the country.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . In addition. Within this region are thousands of retail outlets.275.06 cents per litre. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. This is likely offset by high operating costs. Figure 32: Toronto . and is also relatively close to wholesale supply sources in the US.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .775 30 546 2.36 ¢ 0. Margin/Throughput relationship (Figure 24): This market stood apart from the study group. this market was consistently less than the 10-city average. With an average “blended” gross product margin of only 3. it had the second highest brand variety of the study group. New York. least number of outlets per capita.478 litres 3. stretching from Pickering to Buffalo. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group.Toronto population # of brands # of outlets outlets per 10. as evidenced by an exceptionally low gross product margin. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. and a resultant low consolidated net revenue.000 2. similar to that of Montreal. It consequently has a low freight component. On an ex-tax basis however.3 ¢ 3.

Although petroleum revenues were typical of major markets. freight costs within this market were quite low. and close to the Canadian 10-city average.000 678. in fact.145 19 209 3.97 ¢ 0.004. Influence of other markets: Although Ottawa is the only major market in the immediate area.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price . Other considerations: While pump prices in this market were somewhat higher than in Toronto.Ottawa population # of brands # of outlets outlets per 10. Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.948 litres 5. Figure 33: Ottawa .extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 .ex tax Canada Average .68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. some of which have on occasion priced below Ottawa (see Nanton and Calgary). Consolidated net revenue: was low. several smaller. slightly lower that expected. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. rural markets co-exist in this area. ancillary revenue was slightly lower than average.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. exhibiting all of the characteristics of robust competition. and operating costs were higher than most.29 ¢ 5.

550 litres 8. Influence of other markets: This market is close to a US border market. partly due to higher freight costs. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto).465. somewhat isolated. Pump prices in this market were thus typical of any market with similar throughput characteristics. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. this Canadian market has some difficulty in remaining both competitive and viable.Sault Ste Marie population # of brands # of outlets outlets per 10. a consequence of the transport distance from the rack point.000 81.475 10 24 2.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply.73 ¢ 1. This would suggest that a significant market share is being lost across the US border. Sault Ste Marie is a sizable market. yet with some potential for cross-border retail competition. MJ ERVIN & ASSOCIATES 64 .95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. a product of relatively strong net petroleum revenues combined with lower than average operating costs. average throughputs were modest.22 ¢ 7. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point. and accordingly. Freight costs are therefore high. and between 5 to 8 cent per litre in gross product margin. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput.

006 litres in 1995.310 3 3 9.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. although high. and had the least number of outlets. in fact the second highest in the study group.066 litres 14. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. brands. and outlet throughputs of any market studied. largely due to higher freight costs. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. This would suggest that. Freight costs are therefore high. with little or no influence from other retail gasoline markets.000 3. this market experiences a high degree of price competition. despite its high prices. Sioux Lookout is well-removed from any major highway. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. so that virtually all sales volume represents local demand only.Sioux Lookout population # of brands # of outlets outlets per 10. Influence of other markets: This is clearly an isolated market. This is a major factor in the high cost of gasoline in this market. MJ ERVIN & ASSOCIATES 65 .06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. Consolidated net revenue: No data was available for this market. An average outlet in Sioux Lookout pumped only 694.2 ¢ 11.96 ¢ 3. one-seventh the average throughput in Toronto. was much less than expected for a market of this size. It therefore presents some unique characteristics for the market study.

extax Montreal Posted Price . This market had the highest tax content of the study group due to high provincial tax rates (in 1996.Montreal population # of brands # of outlets outlets per 10.775.43 ¢ 0. placed Montreal lowest of all study markets in terms of consolidated net revenue. this market interacts with several other markets in the region. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets. Price history / Taxation: As the figure shows.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 .3 ¢ 5. pump prices in this market have a tendency to be volatile.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . Influence of other markets: Like Toronto. On an ex-tax basis however. an additional tax of 1. and is also relatively close to wholesale supply sources in the US. Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. It therefore represents a highly competitive rack market. pump prices in Montreal have generally been at or below the 10-city average for major markets.394. With 32 competing brands. with resultant low average outlet throughputs. this market ranks first of the study group in terms of brand variety. a function of a competitive rack market and an excess of retail outlets competing for market share.144 litres 5. Montreal was included in the selected market study.5 cents per litre was introduced into the Montreal area).13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region. This.000 1. combined with low petroleum revenues and high operating costs. thus promoting a competitive climate.870 32 866 4. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Figure 34: Montreal . Geographic / Supply / Freight cost considerations: Montreal has local refining capacity.

although low. within a cluster of other markets with similar attributes.Chicoutimi population # of brands # of outlets outlets per 10. Nevertheless. but as the figure shows. Gross product margin was accordingly high. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John. Chicoutimi is normally supplied from the Quebec city rack. Margin/Throughput relationship (Figure 24): Outlet throughputs. a partial factor in the high cost of gasoline in this market.605 14 97 8. yet is geographically quite isolated.289 litres 12.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2.250. this amounted to a reduction of 5. Freight costs are therefore somewhat high.2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. both pump and ex-tax prices in this market were higher than average. by tank truck. In the case of Chicoutimi. but is quite isolated from any other markets. were quite typical of markets with similar populations.000 120.08 ¢ 11. Consolidated net revenue: was average among the study group.28 ¢ 1. MJ ERVIN & ASSOCIATES 67 . Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.75 cents per litre. for example). this market has little potential as a rack market. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base.

Nevertheless. a product of high freight costs and gross product margins. Influence of other markets: This is clearly an isolated market. Freight costs are therefore high. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. a key factor contributing to its 14. amounting to a reduction of 5. Consolidated net revenue: No data was available for this market.75 cents per litre.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. ancillary revenues would likely be modest. this margin was only slightly higher than expected for a market with these throughput attributes. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. This is a major factor in the high cost of gasoline in this market. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. Gaspé is well-removed from any major highway.Gaspé population # of brands # of outlets outlets per 10. in fact the highest in the study group.17 gross product margin the highest of the study group. by tank truck.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981. Although operating costs are likely to be low in a small market like Gaspé.33 ¢ 14. MJ ERVIN & ASSOCIATES 68 . located at a considerable distance from its rack source of supply.900 litres 17.000 16. with little or no influence from other retail gasoline markets. Nevertheless. both pump and extax prices in this market were higher than average. in the case.50 ¢ 3.400 6 13 4. so that virtually all sales volume represents local demand only.

extax MJ ERVIN & ASSOCIATES 69 . this market fell within the expected range of gross product margins as a function of outlet throughput.095. Since provincial taxes are among the lowest in the country.ex tax Canada Average . resulting in lower than expected average outlet throughputs. the Saint John retail market is relatively isolated from other retail markets of any significance. do not differ markedly from any other rack point in the study group. In fact.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner.694 litres 9. which for Saint John. Nevertheless. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor.970 9 56 7. posted pump prices in the Saint John market have closely followed the 10-city average.79 ¢ 0. Saint John presents some unique characteristics for the market study. with or without a local refinery. That a major refinery resides in this market might suggest that these prices should be among the least in the country. Average gross product margin was consequently high. and therefore.27 ¢ 9. Price history / Taxation: Historically. retail pump prices are ultimately a reflection of rack prices. Consolidated net revenue: was average for the study group. reflected in the high ex-tax pump price. ex-tax prices were relatively high.000 74.Saint John NB population # of brands # of outlets outlets per 10. it is an established rack point.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. freight costs in this market are low. Accordingly. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. and is capable of shipping and receiving wholesale product through marine facilities. Figure 35: Saint John NB .

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

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Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

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Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

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.................. 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes........................................ which ensures a competitive product price for buyer and seller alike........................ when compared on an ex-tax basis... 33 Finding 13: From 1991 to 1996................ remote population centres............ The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.... after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.............. 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences. given the possibility of discounts from posted rack prices and potentially lower overhead costs........................................................... the residual represented a net loss to the supplier.. ... .................. residuals for outlets not studied may be better.... reduced pump prices. and likely a negative impact on consumers............. which in turn...................................... .............. The viability of the Canadian retail gasoline sector as a whole may be somewhat better........................................... ...... Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences...... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre.... 71 MJ ERVIN & ASSOCIATES 73 ................................ the profitability of the 481 outlets studied appears only marginal..... 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness............Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products................................51 Finding 21: Based on published rack prices and the individual outlet data...... these ancillary operations contributed to a lower product margin and consequently.................................................... a feature of most market-regulated commerce........................... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs.............. 50 Finding 20: For the 481 individual outlets studied. petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied. ............. In effect................ while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre.......... 48 Finding 19: Based on published rack prices...................... particularly in comparisons of major urban markets to small................................ 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels.... ........ are principally a reflection of changes in the underlying price of crude oil......... while those with high Gross Product Margins tend to have low outlet throughputs.................... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US...

was observed (Finding 10). a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). in comparing Canada average (city) pump prices to those of the United States. price is but one of four competitiveness “tools” available to marketers (product. In comparing several diverse markets. is mistaken. Rack and pump prices are determined in competitive marketplaces. Although an objective measure of competitiveness is elusive. exhibited a diminishing trend (Finding 13). As described in this study however. by all objective measures available to this study. was shown to be strongly competitive: • A long-term decline in pump prices. when measured in constant and nominal dollars. when taxes were excluded (Finding 14).Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. each with unique dynamics. On a national level. The resultant margins. 2. This has not simply been a result of a decline in underlying raw materials costs. The study presents such a model. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. and promotions are the other three). Canadian prices have been at or below US prices in recent years. over the long term. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). place. Virtually all of the competitiveness indicators examined in this study relate to price. the very margins within which this industry operates has. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. 1. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The Canadian retail petroleum products industry. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement.

In applying such a model to the retail petroleum marketing industry. refiner margins accounted for 5. The latter two can vary considerably from one market to another. vary considerably from one population centre to another. retail petroleum markets are considered local (municipal) in scope. rack price and freight cost. and product margins accounted for 3. these markets have managed to sustain a certain level of viability and competitiveness. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. are thus a reflection of the state of product supply. presents a competitive disadvantage to Canadian marketers. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market.even negative values. and are a predominant cause of inter-regional pump price differences (Finding 16). Due to the localized nature of competition in the retail gasoline marketing sector. This would entail the tracking of not only pump price. While some markets.3 cents or 9 percent (Finding 5). A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. and accordingly. By contrast. for example) were rationalized. municipal levels of government. it is important to understand that. This implies that the competitive dynamics pertaining to these retail markets can. but also rack prices and outlet performance. The demonstrated exception to this is in markets directly adjacent to nearby US markets. well over half of all outlets in Canada operate as lessees or independents. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. Taxation is a significant factor in the price of retail gasoline. or even between Canadian markets with differing tax structures. and in some markets. provincial. taxation as an element of public policy is an area worthy of additional research.5 cents. and do. but given its magnitude. demand and other competitive factors existing at the time. and in some markets. crude costs accounted for roughly 34 percent (Finding 2). experienced higher than average pump prices. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). but even in such cases. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. since this is the effective range of consumer choice. 3. Dealers were shown to have a variety of relationships with their supplier. particularly smaller ones. or 6 percent (Finding 6) of the 1996 average regular pump price. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). Petroleum product taxes are levied at the federal. an exercise that consumers are unlikely to engage in. taxation differences between Canadian and US markets. when the “outside” factors (tax. generally do not serve as competitiveness inhibitors. measured against the average outlet throughput for that market. MJ ERVIN & ASSOCIATES 75 .

on a per litre basis. showed a close relationship to underlying crude prices (Finding 11). Viewed from this perspective. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. fluctuating prices are a strong competitiveness indicator (Finding 7). This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. and a loss in the case of urban markets. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. and more price-stable markets such as Sioux Lookout.Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. Sioux Lookout. MJ ERVIN & ASSOCIATES 76 . Retail gasoline marketing revenues. 4. which in turn is the principal driver of ex-tax pump prices. constitute a small portion of the retail pump price. second only to the United States. predictable seasonal pattern. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. This consolidated outlet revenue. Retail pump prices showed a corresponding seasonal pattern.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). While price wars are undoubtedly an indicator of competitiveness. supplier costs and profitability. on the basis of price fluctuation alone. which in turn. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. The pump price/margin model shows that in 1996. Rack prices were shown to not significantly differ between major centres. when examined on the margin-volume model. is available to provide for all retail marketing operations including outlet costs. dealer income. exhibited competitive traits typical of any of the study markets. Pump price fluctuations can be an indicator of competition in the marketplace. 5. in a highly distinct. the Canadian retail marketing sector realized an average gross margin of 3. In fact. incorporated with ancillary revenues and outlet costs. when distributed these three ways (Finding 20). Retail pump price changes showed a close relationship to underlying rack prices. This margin represents gross revenue (after wholesale product and freight cost) which. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). Demand for gasoline was shown to vary significantly according to the time of year. reflecting consumer demand behavior (Finding 15). the absence of price war activity does not imply a lack of competitiveness. which represent the majority of Canada’s population base. a price-stable market.

these findings clearly show that pump price increases are ultimately linked not to increased profits. Nevertheless. Indeed. Thus. MJ ERVIN & ASSOCIATES 77 . This trend has both resulted in. including: • • • improving production efficiency through refinery plant rationalizations (closures). assuming all other costs were unchanged. this industry sector would have realized profits of unprecedented proportions. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. Both the downward trend in margins. if Canadian average pump prices were only one cent higher than they were in 1995. several competitive strategies. 7. despite the predisposition of many observers to use them as such. Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. crude costs. not excessive profits. serve as perhaps the most significant indicators of competitiveness in the downstream industry. both of which are beyond the direct influence of Canada’s oil companies. despite increases in tax content and crude costs (Finding 12). Declining refiner and marketing margins. intense competitive pressures in the downstream industry in general. While these economics might appear to place this industry in a position of poor viability. based upon an assumed posted rack price. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). most outlets used in the 19-market study represent major integrated oil companies. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study. and the associated industry initiatives which are ongoing in nature. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. and the marketing sector in particular. Also. Also. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. in the long term these fluctuations are likely more reflective of market restorations. Industry profitability is extremely sensitive to very small changes in pump price. and in turn. have caused. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. and have resulted from. but to increases in underlying rack prices. and has been a result of. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.6. not price. Since 1991. Thus.

This created some economic pressure to sell product at a higher pump price. When these margins were compared to their corresponding outlet throughputs. more isolated markets are generally higher than in larger centres.8. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. Thus. reducing the number of outlets may also reduce the number of competitors. Smaller. although this study provides comprehensive evidence of this. In suggesting this approach however. While competitiveness in most smaller markets was shown to be as active as in larger centres. Outlet throughput is a key determinant of inter-market pump price differences. That such a relationship should exist was not surprising. Although some smaller markets appeared to have higher gross product margins than larger markets. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. most markets. which should. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. • • At first glance. When plotted against the margin-volume model. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. The costs of most consumer goods in smaller. reduce pump prices. 9. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). virtually all of the 19 study markets exhibited similar levels of competition. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. there are three points to consider: • In very small markets. average pump prices were relatively high. MJ ERVIN & ASSOCIATES 78 .5 million fewer litres of gasoline than a group A (major centre) station. other factors exist which contribute to relatively high margins and prices. the solution would be to encourage some dealers to exit the market. thereby improving petroleum volumes and ancillary revenues at the remaining sites. regardless of size. A wide range of petroleum gross product margins were evident within the 19market study group. isolated markets face particular challenges: although found to be highly competitive. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). had petroleum margins which were commensurate with average outlet throughput for that market. it would seem that if local government in smaller markets were interested in lowering pump prices. which could actually inhibit competition. and this study showed that gasoline prices were no exception. according to the margin-volume model. poor outlet throughputs were generally the predominant factor.

are an acceptable limitation on pure competition (Finding 8). and in turn. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Also. 11. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. and the traditional automotive service bay.• A full-serve retail gasoline outlet typically employs 3-5 staff. in order to build upon the findings in this study towards a full understanding of the dynamics at work. under the current PEI regulatory structure. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. depressed petroleum revenues below that of outlet operating costs. many national and local environmental regulations exist for good cause. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). MJ ERVIN & ASSOCIATES 79 . is both the cause and consequence of increased activity in ancillary operations. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. The historical record is clear however: since deregulating pump prices. is well beyond the scope of this study. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. 10. As these findings show. This competition then. will likely preserve a highly competitive petroleum market. Retail ancillary operations are a critical element of petroleum price competition. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. characterized by narrow product margins and relatively flat pump prices. Convenience store. and the perceived effect on their markets. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. does not appear to benefit in consumer terms. Charlottetown. is viewed as an agency which exists to the benefit of industry and consumer alike. as marketers find even more innovative ways to attract market share. the Halifax market. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). The federal Competition Bureau for example. has seen a decline in pump prices relative to other Canadian markets. The loss of employment represented by a station closure may be of some concern to smaller communities. and likely others in Nova Scotia. car wash. the degree of price competition in the retail petroleum has in effect. and as such.

Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. Develop cooperative industry research into marketing sector competitiveness issues. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Public perception measurement. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. in a simple format designed for consumers and legislators. 1. that where a healthy competitive climate exists. This should be in the form of a quarterly summary of price trends and related measurements. possibly to the detriment of the consumer. and the nature of competitiveness influences. as it does in the Canadian petroleum marketing sector. margins and competitiveness factors.This study proposes rather. petroleum marketing competitiveness. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. 2. not inhibit. direct regulatory interventions may have an adverse effect on competitiveness. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. Improve public understanding and awareness of competition in the petroleum marketing sector. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . A regular comprehensive competitiveness evaluation. and the converse image held in much of the public domain.

by industry. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. using Canadian and foreign selected markets.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. along the lines of the model used in this study. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. using Canadian and foreign selected markets. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. and issues/opportunities facing such markets. consumers. using Canadian and foreign selected markets. and regulators alike. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. and in particular. MJ ERVIN & ASSOCIATES 81 . the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. • • • • * * * Better understanding of this industry.

Appendices MJ ERVIN & ASSOCIATES 82 .

Distribution Costs . car wash.a service provided in addition to the basic retail petroleum sales operation. provincial pump tax.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline.the difference in pump price between a premium or mid-grade of gasoline vs. and commission dealers. and in some regions. of transporting petroleum product from the rack point to the final point of sale.I Glossary of Terms Ancillary service . and included in the retail pump price. GST. The ex-tax pump price is exclusive of these taxes. currently established at 10¢ per litre. municipal tax levees. for example. such as a retail gasoline outlet. Margin . which serves as the voice of the petroleum products industry in Canada on environment. There are several modes (see below) of dealer operation. and therefore purchases its supply of petroleum product from an outside source.(for the purpose of this study) the cost. generally expressed in cents per litre.a petroleum marketer who is not involved in the refining of petroleum products. Lessee .the retail price of gasoline that would be displayed if all product taxes were removed. Integrated Oil Company . Marketer . such as a major oil company or regional refiner/marketer. but inclusive of any corporate taxes on earnings. Dealer . such as lessees. an association of petroleum refiners and marketers.. safety and business issues.. etc. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. independent dealers. in cents per litre. lubricants. such as convenience goods.Canadian Petroleum Products Institute.a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier. Usually expressed on a per-unit basis.an organization who sells refined petroleum products to end-use consumers. These product taxes include Excise tax. Excise Tax . service bays. diesel. health. Independent Petroleum Marketer .a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. the regular unleaded pump price. Major Oil Company . Ex-tax Pump Price . CPPI . Grade Differential . Downstream .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry. etc. MJ ERVIN & ASSOCIATES 83 .a generic term referring to a retail outlet operator.

usually per month or per year.the type of contractual relationship between the supplier and the dealer (outlet operator). Transfer Price . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. manufactures (from crude oil) a range of petroleum products suitable for consumer use.the wholesale price posted at the rack point.the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products. Refiner .an organization who.the point at which title to refined product is transferred from the refiner to the supplier. the raw material from which petroleum products are manufactured. MJ ERVIN & ASSOCIATES 84 . Throughput . and independent dealer. Upstream . the supplier has initial title to the petroleum product as it leaves the rack point.within the context of retail gasoline marketing. these can be broadly classified as company operated. Rack Price . In the retail gasoline sector. an association of upstream and downstream oil companies and related organizations. Although in theory the transfer price could be set at any arbitrary value. Supplier .the segment of the oil industry involved in the exploration and/or production of crude oil. Regional Refiner/Marketer . it is usually based on the market-driven rack price.Mode . lessee. PCF . This may be at a refinery loading terminal. Rack Point .Petroleum Communication Foundation.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. commission dealer.

1 103.4 152.3 119.8 106.8 135.2 109.1 1990 119.2 133.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.6 136.9 26.3 125.1 104.1 40.3 40.4 136.5 115.1 120.7 123.1 126.1 105.9 97.2 20.1 146.4 27.5 30.1 117.5 126.3 151.2 49.0 104.2 45.5 120.4 29.5 49. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.9 108.3 134.4 104.5 25.3 115.5 100.7 30.0 30.8 94.0 42.5 111.3 19.7 118.2 121.9 1993 130.3 1992 128.0 115.4 104.0 135.1 26.2 39.2 99.9 155.3 160. 62-010: Consumer Prices and Price Indexes.0 93.8 1987 104.4 45.2 112.0 19.1 97.4 134.7 54.8 28.9 1995 133.2 127.1 144.0 93.0 102.6 107.5 112.0 1988 108.8 104.8 93.5 145.2 30.9 26.2 50.4 53. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.8 95.1 151.9 122.9 1994 130.3 122.4 110.5 124. MJ ERVIN & ASSOCIATES 85 .7 132.5 94.1 87.7 124.8 132.7 122.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.4 120.1 115.4 122.1 104.7 29.3 139.6 133.2 45.3 52.6 122.9 118.0 1991 126.4 124.7 95.0 97.6 91.3 96.6 51.3 132. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.2 142.1 48.1 120.1 117.9 115. Nominal (¢/litre) (2) RUL Ex-tax Price.3 1989 114.4 57. using a weighted (by provincial gasoline demand) 10 city average. Nominal (¢/litre) (2) RUL Annual Price.3 27.4 34. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.3 58.7 96.1 167.8 108.8 130.6 92.8 47.3 55.2 31.0 32.3 141.4 97.7 22.0 111. No.2 92.

0 33.2 7.6 20.1 13.0 9.7 29.3 9.6 23.9 7.1 23.3 14.2 14.1 24.9 25.0 7.2 26.9 54.7 4.2 41.4 8.1 16.4 26.2 16.4 31.7 58.5 15.9 53.7 63.0 5.1 9.9 23.2 56.8 13.6 18.9 9.2 27.2 7.3 13.6 5.Table B: Key Price / Margin History .5 54.8 30.2 14.7 18.1 53.8 15.3 4.1 39.2 29.2 13.7 24.4 13.0 7.4 14.4 31.9 8.7 14.1 16.6 9.1 13.6 26.2 15.4 14.4 15.5 56.7 19.2 13.9 23.9 30.7 31.4 MJ ERVIN & ASSOCIATES 86 .9 6.2 7.0 26.4 22.8 53.3 13.5 23.0 15.6 6.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.1 13.4 26.5 23.1 16.9 25.9 58.8 29.0 24.0 24.5 57.1 5.3 15.4 33.6 25.0 20.7 7.1 22.1 53.6 25.8 21.2 5.7 19.1 23.5 27.6 21.2 12.3 17.4 32.7 25.4 56.8 9.4 12.2 6.0 16.5 10.8 28.5 32.0 7.8 55.3 57.5 11.5 8.3 15.9 15.4 9.1 22.9 21.9 26.5 14.1 18.4 21.3 26.8 26.0 13.5 6.4 24.5 27.2 23.2 25.3 13.8 53.8 8.0 16.9 31.8 26.7 6.6 26.6 54.3 24.7 29.4 14.3 13.7 14.6 28.3 12.5 30.3 26.5 23.5 19.2 4.2 25.3 56.1 23.0 55.6 26.7 32.8 14.1 52.9 56.9 25.9 56.9 55.9 4.9 14.6 13.2 27.5 28.0 8.9 13.4 24.6 23.4 7.2 13.9 12.4 30.9 53.9 24.5 16.7 7.8 14.0 4.8 16.9 55.7 13.9 25.5 35.5 26.2 63.2 6.3 23.7 14.0 28.3 56.9 7.3 54.9 22.3 58.3 42.7 34.8 33.9 26.0 24.7 14.7 7.9 23.2 65.5 Gross Marketing Margin Gross Refiner Margin 53.9 11.2 26.0 26.6 54.4 53.1 7.8 11.6 24.7 8.8 55.3 6.6 52.8 14.1 18.1 16.6 7.9 4.3 54.0 24.0 26.7 33.4 13.5 7.2 8.3 13.7 14.4 29.0 14.4 57.3 5.6 4.4 34.2 22.7 28.1 21.7 12.5 33.0 10.0 24.5 31.0 25.3 66.5 14.8 57.1 19.3 54.0 54.8 22.9 7.9 6.9 25.1 7.0 16.3 Tax Content 23.5 10.3 22.8 23.8 21.5 26.6 54.7 4.0 24.5 25.7 18.7 29.7 Downstream Margin 14.2 21.0 25.2 7.1 17.6 8.9 14.9 6.3 25.1 29.4 55.5 7.0 52.1 25.3 6.7 4.8 25.8 24.4 20.2 11.2 23.7 15.7 23.2 24.2 13.0 24.0 12.5 5.0 22.2 16.8 23.6 13.0 16.7 39.8 8.3 22.2 27.9 17.8 14.4 58.4 26.5 22.4 14.

6 20.7 16.2 28.1 10.9 29.7 15.7 5.2 25.4 16.5 25.5 6.1 15.1 15.1 51.9 26.5 17.5 3.0 54.8 52.2 7.9 6.4 6.2 7.9 23.7 29.8 23.9 11.7 53.7 23.6 17.6 21.6 15.9 49.2 15.0 28.1 6.5 21.0 28.1 55.1 11.7 5.1 6.6 16.8 28.4 26.1 14.3 12.7 52.0 28.7 14.5 15.2 20.3 4.9 9.5 11.7 6.7 14.4 4.6 10.1 26.5 13.7 51.4 26.9 12.3 13.1 26.1 Tax Content 26.8 23.5 55.7 26.7 7.3 26.9 27.0 25.7 24.1 54.1 57.9 49.5 5.3 4.1 6.6 10.8 25.3 7.7 53.6 15.3 26.9 14.8 27.0 26.5 11.9 28.4 7.5 7.9 12.7 13.1 21.5 19.5 21.8 29.5 53.3 7.4 6.3 26.0 28.4 26.5 5.0 14.2 49.4 21.5 7.5 13.8 20.2 25.0 28.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.2 14.3 9.3 21.6 20.3 26.9 4.4 6.5 19.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .3 26.0 9.2 23.4 11.5 3.6 4.2 26.0 6.8 28.4 5.1 26.8 10.8 4.1 24.2 7.0 14.2 14.5 20.8 22.4 6.0 26.6 27.2 5.2 12.2 20.3 55.2 11.3 28.7 6.8 50.6 3.3 6.1 3.4 32.1 51.9 Downstream Margin 12.0 53.6 12.7 25.2 14.1 14.7 3.3 9.5 2.2 26.1 6.0 6.5 28.2 54.2 4.0 9.2 Gross Marketing Margin 4.6 53.2 4.4 24.3 23.3 26.5 14.0 57.7 25.6 4.4 25.3 28.5 6.9 14.4 25.7 3.6 5.7 8.3 53.6 19.9 4.1 11.0 5.4 15.7 7.9 27.8 17.0 25.3 9.3 26.4 13.4 26.5 23.5 9.1 20.5 21.3 26.1 Gross Refiner Margin 7.1 61.1 11.3 8.7 12.3 58.5 6.9 3.1 16.0 29.2 7.0 11.7 13.9 29.1 15.0 24.0 52.7 24.0 6.4 51.2 27.3 54.0 27.3 21.4 21.0 12.2 9.9 5.6 23.6 11.0 5.8 6.3 26.5 54.1 14.9 19.6 53.0 12.7 26.3 4.1 11.3 27.5 4.9 17.7 18.8 49.6 9.7 53.3 25.9 58.2 26.4 28.

373.201.8 29.322 2.427.837.725.744.7 21.897 3.220.932 2.498.473.3 22.566.782 3.102.904.235 3.199 2.637 3.279 2.810.2 22.180 2.263.979 2.039.457 2.4 32.508.281 2.322 3.1 16.6 21.120.627 2.409.822.796.027 2.324 2.841 2.930 3.285 2.5 27.667 2.979 3.0 28.002.416 2.141 3.716.801.615 2.672.301 2.181.626.430.295.180 3.176 2.301.325 2.477.262.752 2.315 2.8 26.268 2.8 30.677 3.287 2.8 23.654.622.865.521 2.633.1 23.801.7 28.294.510 3.970 3.3 24.633 2.889 3.897.6 24.333.941 2.2 27.298 2.693 3.5 31.378.1 22.2 23.299 2.455.5 23.480.7 24.773.644 3.628 3.045 2.412 2.4 21.748.281.132.286.422.7 24.2 20.8 21.095 2.329 3.2 29.297 2.833 2.587.313 2.703 2.967 2.251.5 19.335 2.3 23.301.589 3.973.255 3.044 2.671.827 3.245.3 22.935 3.9 30.804 2.930.808.609.377.075.9 23.030.8 33.0 20.291.799.101.2 24.441.411.661 Canadian Domestic Gasoline Sales (M3) 2.316.081.2 26.572 2.283.218.361.968 3.767.019.246 2.113.8 27.0 24.122.893.485 2.133 3.641.3 23.045 2.625 2.141.9 22.612 3.7 29.7 18.369.9 31.7 29.900.976.887.673 2.5 27.047 2.6 28.381 2.952.960.647.067.998.5 22.682 3.830.345.499 2.180.874 3.379.5 28.003.Table C: Canadian Supply.458.876.8 MJ ERVIN & ASSOCIATES 88 .338 3.735.804 3.688.869 2.966.5 32.026 2.450 2.202 3.193 3.218 3. Inventory.025.873.070 3.859 2.687.9 23.7 26.047 3.475 2.646 2.840.000 3.743 2.232 3.112 2.732.938.9 26.714.3 26.490 3.844.516.311 3.666.300.969 2.366 2.883.209.642.476.620 3.4 21.502 2.729.544 3.843.321.403 2.095.462.070.669.880 Canadian Retail Gasoline Sales (M3) 2.322 2.4 29.3 Canada Avg RUL Rack Price (¢/l) 35.242 2.035 2.045.995.437.443 2.853 3.083.4 24.890.818.179 3.354.710.621.651 2.142.518.934.813 2.346.2 27.871 2.020 2.933 3.765 3.771 3.164.630.8 23.802 2.604 2.415 2.931 3.886 3.022.2 26.7 29.182 3.748 2.684 2.191 2.1 23.122 2.429 2.9 23.056 3.897 2.160 3.326.206.592 2.9 26.785.884 2.661 Canada Avg ex tax RUL pump price (¢/l) 39.2 21.636.767.270 3.073 2.709 2.970.6 23.2 27.779 2.600.461 3.9 29.089.479 2.168 2.853.114 3.532.085.831.1 23.287.8 28.151.9 21.369 2.558.029 2.564 2.323 3.781.130 3.970.015 3.9 19.192.619 2.878 2.254 2.269 2.130 3.152 2.254.370 2.202.501.2 27.097 2.839 2.9 17.682.456 2.108.894.161.141.5 25.798.958.331 2.1 21.4 25.823. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.287 2.739.4 24.256 2.101 2.509 3.469 4.439.037 2.720 3.011 2.131.636.7 34.2 23.193 3.558.437.4 31.250.7 31.733 2.4 22.299. Demand.775.613 3.1 29.565.853 2.5 30.176 3.864 2.389.140.599 2.051 3.6 26.188 3.429 2.254.580 3.709 2.8 22.

480 2.386 3.566 3.796.797.906.9 27.8 25.649.785.537.970.644 3.889.198 2.4 26.222 2.675 2.601 3.346 2.4 26.0 24.077.264 2.703 3.198.170 Canadian Retail Gasoline Sales (M3) 2.0 26.195.0 26. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .1 21.048.4 20.516 3.649.606.415 2.148.055 2.037 3.097.317 2.250.593.198.6 20.324 2.320 3.5 source: Statistics Canada (production.825.426.414 3.984 3.9 22.671.7 21.8 20.0 25.205 2.692.669 2.863.4 25.324.0 25.082.7 19.519.930.074.7 22.179.667 Canadian Domestic Gasoline Sales (M3) 3.149.679.1 24.881.999 3.184.294 3.344 3.130 3.141 2.376.338 2.806.112 3.155 2.840 2.123.928 3.165.2 25.006 3.469.717. demand.2 25.336.994 3.799 2.214 2.182.656 3.204.658.965.261.521 2.005 2.382.555.539.648 3.9 29.442 2.753 3.791 3.617 2.7 Canada Avg RUL Rack Price (¢/l) 20.638 2.386 3.857.2 26.773.068.5 25.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.8 28.264 2.919 2.467 2.5 21.977.961.986.620.390.614.997 2.505 2.8 24.936 3.864 2.219 Canada Avg ex tax RUL pump price (¢/l) 27.830 3.607.370.940 2.363.597 2.6 20.660 3.315.714 2.244 3.871 3.5 21.483.170 3.8 21.904.

3 56.4 53.0 39.1 50.4 56.2 59.2 54.5 58.8 47.7 65.4 49.0 52.7 65.7 57.9 54.9 53.5 59.7 53.5 58.8 52.3 52.7 50.4 58.8 44.7 45.4 59.5 57.6 47.6 54.9 49.8 50.8 52.4 46.4 53.6 62.4 56.9 56.5 58.8 50.1 41.2 Nanton Peace River Regina 49.5 57.4 65.9 56.8 56.2 63.5 46.7 44.3 48.7 62.5 56.0 46.0 50.9 64.6 56.9 56.5 53.7 49.0 48.9 55.6 46.5 45.9 54.4 52.9 54.6 52.1 49.7 65.7 51.3 52.0 Sioux Lookout 62.2 62.9 54.0 61.9 56.5 60.1 44.2 46.5 60.9 55.5 60.7 51.5 57.9 53.9 64.0 61.9 58.8 Thompson 59.5 59.3 55.0 62.5 45.7 63.5 58.9 57.8 56.5 59.6 49.Table D: Pump Price History .9 58.9 53.5 57.5 58.0 62.6 50.3 52.4 61.5 47.2 47.4 63.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.9 56.5 53.6 44.5 61.0 55.9 44.3 50.9 54.2 57.5 60.2 58.8 45.4 46.7 52.8 47.9 57.8 64.5 58.3 49.0 44.9 58.0 52.3 49.9 64.1 55.9 61.3 54.6 50.3 59.8 53.9 MJ ERVIN & ASSOCIATES 90 .5 52.5 49.2 51.4 55.7 50.2 46.5 51.4 52.9 53.6 53.2 65.2 62.6 48.5 47.8 52.5 57.9 52.3 61.5 59.5 56.9 56.5 58.2 46.2 50.9 64.1 56.5 59.6 55.5 53.8 59.5 57.8 56.6 58.6 53.9 54.4 54.6 51.8 59.8 48.1 55.5 58.4 58.9 59.9 53.4 57.3 52.7 45.1 49.0 54.9 63.2 62.1 50.5 59.4 61.2 50.9 53.5 Vancouver 53.9 55.4 53.6 54.8 54.2 62.5 56.8 52.9 61.2 62.9 44.4 55.3 48.5 57.3 55.7 53.9 46.5 47.4 Winnipeg 49.9 56.3 51.1 53.5 57.2 54.9 52.6 46.5 50.5 57.0 58.9 53.9 61.4 54.7 46.5 57.1 49.4 48.5 55.1 43.0 57.5 61.2 50.5 58.8 53.4 55.8 53.5 54.4 52.3 62.2 55.9 48.9 47.8 52.9 53.2 62.2 62.4 54.5 58.9 47.9 53.8 53.8 48.4 61.9 51.4 56.8 56.9 56.2 62.5 54.9 51.2 51.8 57.8 56.5 59.8 51.9 49.4 50.8 48.3 42.4 55.9 62.1 52.5 58.7 54.2 51.0 61.2 56.2 54.7 54.5 60.5 59.8 57.7 White Rock Calgary 45.9 51.9 59.8 55.4 55.5 58.7 52.2 48.6 47.4 46.5 60.9 51.0 59.7 51.9 53.9 45.5 52.9 58.1 44.9 52.9 54.5 57.8 48.5 51.1 55.5 56.8 41.3 50.9 52.4 52.6 58.1 53.9 53.5 51.9 54.3 54.6 48.0 61.9 55.7 62.0 62.4 56.0 61.9 50.2 62.7 65.9 61.9 64.4 57.5 57.9 61.2 43.7 48.7 54.5 62.9 62.7 48.2 65.8 49.5 59.4 52.9 47.9 49.0 59.0 61.7 65.5 56.0 61.4 56.8 56.2 61.5 51.6 47.5 55.9 47.9 52.9 56.4 56.4 55.9 56.1 59.9 58.9 52.9 56.5 51.1 52.3 52.4 47.6 59.6 48.7 53.9 52.7 57.1 60.5 57.9 61.6 55.

9 51.2 58.1 55.4 58.2 57.2 51.5 54.6 63.2 54.5 61.0 54.0 51.7 50.9 58.0 54.7 56.5 56.9 56.5 63.8 60.4 54.7 57.1 59.3 53.4 53.5 MJ ERVIN & ASSOCIATES 91 .8 55.6 52.7 48.3 55.0 55.8 56.3 52.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.6 54.9 50.3 52.7 56.6 53.6 59.5 51.7 49.7 59.1 52.2 56.5 53.9 55.9 49.9 49.7 59.0 47.6 50.2 56.2 58.0 59.5 55.7 52.5 59.6 56.2 57.2 55.2 52.0 56.5 60.9 57.3 59.5 Ottawa 58.1 53.1 56.0 52.9 53.3 55.8 57.0 55.2 57.0 56.5 52.2 58.8 53.2 54.8 49.2 56.9 52.4 57.8 60.6 54.2 53.9 57.7 56.5 57.9 64.3 56.0 52.9 60.0 53.6 58.5 59.5 48.2 57.8 59.4 53.1 48.8 51.6 54.5 56.5 56.Table D: Pump Price History .1 58.1 51.0 57.6 52.2 53.6 Canada Avg 55.4 52.0 60.5 60.0 60.7 53.2 53.7 56.2 55.6 50.6 51.4 58.3 54.0 55.8 47.7 52.0 57.6 54.0 49.0 47.1 55.6 54.6 55.6 55.3 56.0 50.3 52.2 60.9 55.6 52.7 44.8 50.9 64.1 55.2 51.1 53.8 50.2 61.2 59.8 Halifax Charlottetown 60.2 49.1 54.0 48.1 58.6 55.3 54.1 56.0 55.8 52.6 58.3 59.0 60.2 56.8 61.6 53.2 54.9 55.6 50.5 53.7 54.0 56.8 55.3 53.5 61.4 45.5 54.7 51.6 60.0 52.5 54.9 56.8 50.4 51.7 51.6 53.1 60.5 52.4 54.3 53.7 52.2 55.4 57.2 49.7 57.3 58.2 57.9 53.4 54.2 61.4 51.2 61.1 58.3 49.1 57.8 55.6 52.6 55.3 54.4 53.7 54.1 53.9 49.3 54.3 54.1 58.6 49.6 61.1 52.3 55.8 54.9 63.0 50.2 55.5 63.2 57.9 49.8 55.5 55.4 49.4 54.5 63.6 59.2 Chicoutimi Gaspé Saint John 60.6 56.5 57.5 51.7 57.3 56.3 56.3 53.1 52.0 59.0 53.3 59.4 58.0 52.0 61.5 57.5 56.9 62.6 54.0 60.9 56.2 49.5 54.6 51.9 61.4 58.8 53.8 49.9 61.9 55.8 55.9 60.7 57.7 48.2 Montreal 63.2 55.2 54.6 52.2 54.3 55.6 55.2 56.9 54.3 59.1 54.8 63.8 54.2 57.5 51.6 52.5 54.9 55.7 53.0 54.0 58.6 57.3 55.3 54.6 51.1 56.0 57.1 55.6 56.5 51.9 60.0 55.6 63.1 57.6 52.3 57.4 52.0 48.2 60.9 54.1 55.3 54.5 64.4 53.0 61.9 55.1 54.8 52.6 53.8 54.3 61.2 56.8 53.1 53.8 61.9 55.1 49.1 60.2 52.7 51.3 53.4 54.3 51.7 54.7 57.9 53.6 58.5 55.3 62.1 51.1 55.9 55.9 56.4 50.5 53.9 61.5 54.5 57.3 49.7 54.8 55.4 60.9 61.1 57.0 51.1 54.5 59.7 56.1 54.5 53.7 58.7 51.6 49.6 58.9 57.7 54.9 64.8 55.9 55.4 58.6 56.2 52.2 51.0 50.0 59.5 61.2 57.5 52.0 55.0 57.1 51.8 57.4 58.0 53.3 52.1 53.2 59.2 55.3 54.3 56.4 57.5 52.4 54.2 56.8 54.8 56.9 61.6 61.5 56.1 61.9 53.0 52.4 54.9 57.6 58.7 60.6 55.2 56.8 57.7 46.9 54.4 57.1 Toronto 52.6 54.7 56.9 58.7 64.5 54.5 58.0 54.3 54.4 57.5 64.1 59.3 60.7 55.2 57.5 57.4 55.4 51.9 55.7 58.2 57.6 59.1 61.9 53.8 55.7 47.6 55.1 54.4 57.3 55.0 52.2 50.4 55.1 61.4 54.5 67.6 63.2 49.7 54.

7 28.0 Oct-93 28.9 23.1 24.8 26.2 26.2 29.9 31.9 24.6 26.7 24.8 27.4 24.8 29.3 27.8 31.8 Feb-94 24.9 Aug-93 30.0 27.7 30.5 27.0 28.9 29.4 27.3 28.0 Jun-93 26.7 30.7 25.1 31.6 26.2 22.4 20.4 28.1 31.9 29.6 23.6 27.0 23.3 32.0 23.9 25.4 23.6 23.6 25.3 29.9 25.3 28.4 31.6 Mar-93 28.5 29.7 29.5 26.5 Aug-94 28.4 31.0 24.9 26.4 MJ ERVIN & ASSOCIATES 92 .7 Jan-95 27.7 27.0 26.0 29.9 Jul-93 28.6 27.2 26.4 27.0 31.7 29.1 22.4 31.3 Dec-95 Edmonton Regina extax extax 27.0 23.4 31.7 28.3 33.3 29.1 20.2 Apr-93 28.2 28.9 30.2 27.8 27.5 21.9 29.6 23.6 30.8 23.9 27.3 30.5 Oct-95 30.1 27.7 29.7 Mar-94 28.5 24.4 29.1 28.2 Nov-92 31.7 29.8 21.4 30.2 24.3 30.4 23.9 25.5 Sep-92 29.0 26.8 27.0 25.3 26.2 26.8 25.3 29.1 Feb-93 29.6 21.9 25.4 20.3 29.4 Dec-92 31.6 29.1 25.3 30.9 Oct-94 32.2 25.4 22.8 24.7 Aug-92 24.0 23.1 30.5 25.5 Nov-95 30.1 25.4 27.5 29.8 27.9 24.1 28.4 31.8 29.5 27.5 24.0 May-92 28.1 24.2 23.9 24.4 29.3 27.7 Winnipeg extax 27.5 Feb-92 28.5 29.7 31.7 28.1 27.0 23.6 26.1 26.6 29.3 24.3 29.2 24.6 24.6 26.4 Jun-95 30.3 26.6 26.0 25.3 26.5 21.9 27.7 27.5 24.4 28.7 26.7 28.3 23.5 23.8 28.8 22.9 21.9 27.5 29.5 Jul-94 29.6 23.6 29.4 25.4 25.3 29.8 Dec-93 26.4 29.2 32.8 28.9 28.6 24.2 28.6 27.8 Jan-94 25.6 29.6 25.4 29.3 30.1 25.8 27.1 Mar-95 29.3 23.7 24.2 29.0 22.8 Toronto extax 26.8 24.2 24.0 25.7 26.7 Sep-95 30.4 30.7 28.3 31.3 29.0 21.3 24.5 29.8 27.5 23.6 Sep-93 28.5 27.3 29.3 28.9 26.7 28.5 27.0 May-93 29.2 28.2 26.0 32.2 27.4 30.8 26.8 24.5 28.9 28.4 29.9 20.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.9 25.9 30.6 26.3 28.6 22.9 21.0 27.5 Jul-95 30.2 25.9 24.4 31.1 24.4 22.0 31.1 23.2 Nov-93 27.6 28.5 26.1 26.4 27.2 Nov-94 29.8 25.0 Apr-92 30.8 26.7 26.0 24.8 26.4 28.3 Jul-92 31.7 30.1 30.6 30.7 Jan-92 31.4 20.7 Sep-94 32.6 Aug-95 30.8 25.4 25.1 Apr-94 29.3 26.3 24.2 24.4 25.4 24.3 Jan-93 30.4 31.2 Jun-94 31.8 28.1 25.7 26.9 27.1 19.6 30.6 26.6 28.6 May-95 29.9 24.9 30.2 Dec-94 26.3 29.4 25.3 21.4 29.1 22.4 22.9 28.3 29.4 23.7 30.4 21.4 Mar-92 28.6 26.3 26.8 24.1 Apr-95 30.4 26.2 28.9 26.3 Feb-95 26.7 30.9 23.5 Oct-92 30.9 28.8 29.0 26.3 May-94 28.9 26.0 24.5 27.3 28.4 29.4 30.8 29.6 Jun-92 32.6 22.4 27.Table E: Ex-tax Pump Price History .6 27.

2 25.6 33.3 28.9 35.0 36.0 32.3 27.4 26.8 30.6 27.1 34.2 30.7 22.4 28.9 28.7 26.8 28.7 23.7 24.0 25.4 33.7 Quebec extax 32.9 29.8 29.3 29.0 26.2 25.3 34.2 30.2 27.2 27.0 29.6 26.5 25.9 30.7 24.5 28.0 28.9 30.6 29.9 27.1 34.9 30.7 25.4 33.5 28.0 30.5 25.2 33.5 33.0 27.3 25.1 29.3 35.9 29.5 25.3 30.2 28.5 25.3 23.0 32.6 31.2 26.2 26.9 30.6 26.2 22.2 32.8 26.7 26.7 33.0 33.2 36.7 28.8 33.6 36.0 28.8 25.4 26.8 29.8 26.1 23.7 29.1 25.2 36.1 30.2 23.3 28.7 MJ ERVIN & ASSOCIATES 93 .2 32.5 33.7 26.1 26.8 30.3 29.8 25.5 25.2 34.4 25.1 30.9 28.4 36.9 23.6 Charlottetown extax 36.6 22.0 33.6 32.3 28.9 37.3 29.5 28.1 24.1 Montreal extax 31.9 33.5 25.2 24.0 25.1 22.1 34.8 29.2 27.9 27.8 28.8 33.4 31.7 26.9 30.3 29.4 31.4 25.8 26.5 33.0 34.3 24.1 29.2 Saint John Halifax extax extax 34.3 33.5 32.1 31.4 27.7 28.9 26.3 34.7 26.8 32.8 24.1 24.7 30.8 23.0 29.8 28.9 31.4 25.5 31.8 30.8 25.7 27.5 27.2 25.9 27.7 24.5 26.7 29.4 24.3 31.7 30.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.7 28.4 36.4 22.0 30.5 29.7 23.6 29.0 28.6 23.0 33.0 34.2 25.0 28.2 24.5 28.9 26.5 26.9 24.9 29.4 31.4 32.8 28.0 28.9 33.3 25.0 26.1 28.9 29.6 27.9 32.0 31.7 23.1 24.2 27.2 27.6 34.6 32.9 29.3 26.8 25.2 22.0 26.6 27.Table E: Ex-tax Pump Price History .2 27.3 29.8 26.2 30.5 36.4 32.8 26.2 33.1 28.8 Canada Avg extax 29.2 27.6 26.7 28.3 34.5 31.6 28.2 26.5 30.1 32.4 24.4 34.2 28.0 36.2 28.3 31.7 34.4 33.1 30.3 31.3 31.2 26.1 32.9 31.8 28.7 34.1 32.2 21.9 32.6 28.7 27.2 22.0 33.0 23.0 29.3 25.2 27.7 27.6 32.1 24.6 31.5 27.8 28.6 36.7 26.6 28.3 31.1 32.7 24.6 34.5 24.5 30.8 32.9 26.8 27.9 29.0 33.1 29.8 32.4 26.0 23.4 21.8 27.7 24.2 29.8 29.3 28.7 28.5 24.8 27.9 32.4 32.5 34.2 27.9 27.5 27.7 32.7 27.7 32.2 22.3 26.8 36.6 33.6 32.8 27.9 32.8 23.4 33.6 32.0 25.4 28.3 26.9 27.5 30.8 23.5 27.3 28.6 28.9 29.6 23.3 25.2 26.6 25.1 26.3 22.8 29.6 25.8 32.8 23.6 26.0 34.3 27.7 32.6 28.4 25.6 24.2 32.4 33.

3 18.2 22.1 Halifax rack 20.9 18.4 21.9 17.4 22.2 19.8 22.9 22.4 20.4 21.9 22.1 23.2 16.1 20.6 23.1 20.7 21.3 23.5 27.7 21.6 19.5 20.7 19.5 21.7 23.8 19.2 23.6 20.7 16.4 17.8 22.7 22.5 21.3 23.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.8 21.2 18.1 18.1 19.8 21.5 17.3 22.6 22.6 25.6 18.1 22.9 21.6 25.1 20.2 23.4 22.2 21.4 21.6 19.4 22.8 23.8 23.5 18.3 21.5 24.8 21.5 19.2 22.9 23.7 17.9 18.5 21.8 21.2 18.1 21.4 20.7 MJ ERVIN & ASSOCIATES 94 .8 23.4 22.7 18.4 23.0 22.9 20.0 22.5 20.7 23.8 19.7 22.0 22.3 21.9 25.8 Ottawa rack Thunder Bay rack 20.4 21.1 22.2 20.2 21.2 16.1 20.7 17.2 20.0 21.8 18.2 22.8 20.6 19.7 22.2 21.9 21.2 20.2 20.7 18.0 22.3 17.0 22.1 22.2 21.8 24.1 16.3 20.5 22.9 22.4 18.1 21.1 19.6 23.9 24.6 20.8 22.0 20.5 22.6 20.8 20.1 22.8 23.5 18.5 22.9 21.5 24.6 19.4 21.7 21.0 19.4 22.4 23.7 19.5 20.7 22.0 23.4 22.9 21.8 20.0 21.0 23.9 20.7 22.0 22.8 18.8 21.1 21.4 21.3 18.1 19.1 20.3 19.6 23.6 25.0 23.2 23.5 19.5 21.4 21.1 21.6 19.0 23.3 21.3 19.1 22.7 22.4 21.8 23.8 18.1 22.5 21.3 20.9 22.3 26.1 21.9 22.1 23.5 20.3 20.1 21.5 21.4 20.2 18.1 20.5 17.9 18.0 23.6 20.1 20.5 22.2 Quebec city Montreal rack Toronto rack rack 19.4 20.5 24.1 20.4 22.4 20.8 20.4 21.3 18.2 20.2 18.3 24.6 21.0 23.7 22.7 21.8 20.9 18.2 17.7 17.9 22.2 21.7 22.2 21.5 17.1 15.3 19.7 22.3 22.4 21.2 21.4 21.3 23.0 23.3 24.8 22.7 21.6 19.8 19.2 20.4 24.6 23.7 20.5 23.9 23.8 18.2 19.1 21.0 21.5 21.0 21.3 23.5 23.2 23.3 21.3 22.8 27.0 23.8 19.6 20.1 24.2 18.0 19.6 20.4 22.8 23.0 20.6 23.3 17.3 23.2 16.7 21.4 23.4 22.8 21.7 21.0 21.4 15.1 15.4 22.7 20.1 23.8 25.3 21.8 20.6 21.7 20.3 23.0 21.9 21.8 23.5 22.4 19.9 21.4 23.5 22.1 21.5 23.4 21.3 17.5 26.2 29.3 22.6 23.3 23.2 19.0 19.6 20.3 20.9 19.1 22.5 21.Table F: Rack Prices .9 22.9 20.0 24.0 21.4 22.4 21.3 19.8 22.2 21.

9 22.7 20.7 18.1 25.5 23.3 23.0 21.0 23.3 23.4 19.7 22.1 21.2 Edmonton Rack 23.3 24.4 20.9 21.1 23.4 24.7 23.5 23.8 24.7 22.9 21.8 23.5 22.6 21.7 24.7 21.8 21.8 20.4 21.4 24.1 20.0 22.6 22.2 20.5 21.7 17.1 21.2 22.9 24.6 23.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.6 21.1 18.2 24.1 23.9 24.9 20.8 24.0 22.9 22.9 22.1 25.1 22.8 22.7 23.2 22.2 23.5 MJ ERVIN & ASSOCIATES 95 .7 21.3 22.5 21.5 21.4 22.6 22.4 21.5 23.9 18.3 23.7 24.3 20.7 22.6 23.8 21.9 19.2 21.6 23.8 23.4 22.3 17.6 19.5 22.4 22.2 20.8 21.1 21.4 23.0 18.7 22.1 25.8 20.1 22.9 20.0 22.0 21.9 23.8 24.5 23.1 23.9 19.0 17.4 23.9 19.4 21.6 23.4 23.0 22.3 18.3 22.2 23.1 20.3 23.8 23.6 21.5 24.0 18.2 22.2 21.2 20.8 19.7 21.6 21.2 20.1 20.1 23.3 22.4 24.9 22.6 20.0 17.8 18.9 22.2 21.2 24.9 18.0 22.5 21.7 21.Table F: Rack Prices .9 21.5 24.2 24.4 21.6 20.0 24.7 22.9 21.7 23.2 22.4 21.5 22.8 22.3 19.9 22.8 25.0 23.2 21.9 19.8 22.7 23.5 23.1 23.5 21.3 20.9 22.7 25.0 25.8 20.6 21.3 19.6 20.4 19.9 19.7 21.3 17.3 24.7 22.0 21.9 19.3 21.5 23.6 21.9 24.9 21.6 17.2 22.3 23.6 25.6 21.1 17.2 19.8 20.8 22.6 21.6 21.6 22.3 20.1 21.5 19.9 23.4 22.7 22.3 22.5 Canada avg rack 22.7 21.1 16.1 21.1 21.5 21.5 22.6 21.0 23.5 20.9 19.6 24.4 21.5 22.5 19.9 22.7 23.6 22.2 23.4 24.3 24.1 23.3 21.5 21.1 23.7 21.7 17.2 24.1 23.0 20.6 19.5 24.8 21.3 24.5 21.0 21.5 21.4 18.5 18.7 21.9 21.9 17.1 19.6 23.7 21.3 17.9 21.6 23.5 21.1 19.4 21.8 20.7 21.5 18.1 23.5 19.1 22.5 22.0 23.5 19.5 20.4 25.0 23.2 22.0 22.2 22.8 22.2 19.0 20.2 23.6 24.3 23.2 23.7 22.8 Vancouver Victoria rack rack 24.6 23.5 24.0 20.2 24.8 22.6 25.2 18.0 24.7 22.7 21.7 24.3 21.6 20.0 21.2 21.9 20.8 23.1 21.5 20.3 21.9 23.6 25.1 24.1 22.7 22.1 16.7 19.9 23.1 22.7 25.2 22.4 22.5 17.9 23.0 22.6 17.9 23.1 23.0 20.5 20.0 22.0 24.4 20.5 23.9 22.4 21.9 21.6 23.1 21.3 23.3 20.9 21.1 18.1 22.0 24.2 23.4 23.7 21.2 20.

985 636.00 66.332 101. Urban.420.89 65.483 2.145.298 576.174.113 2.10 63.30 57.543 2.483 63.643 184.810.749 91.894 1.26 44.48 56.72 74.669 203.745.858.22 59.30 68.50 55.30 66.712 1.997 397.94 55.620.972 429.513 19.97 51.20 54.119 632.19 49.00 48.377 30.141.903 33.196 669.238 2.90 67.890 2.250 748.093.65 54.414 450.35 73.85 48.192 2.971 473.009 54.70 49.10 59.905 183.26 63.704.32 51.060. MJ ERVIN & ASSOCIATES 96 .40 54.628 702.500 378.056.686 273.173 568.00 67.66 50.03 58.018.214 248.02 51.101 447.40 59.70 55.508 2.412 722.850 126.052 84.249.25 57.18 51.11 58.000 1.60 60.246 2.98 59.07 61.400 142.859 240.23 63.90 62.796 529.770 2.597 2.018 2.832 91.058 2.300 578.922 103.268 478.211 15.194.837 329.92 51.85 54.334.30 52.625 64.980 120.19 52.13 58.529 123.895 600.830 2.74 57.87 61.834 71.28 65.50 56.40 63.17 Diesel 64.621 102.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.40 58.23 53.20 61.448.749 243.90 63.50 56.150 48.935 758.45 53.00 57.000 217.97 63.614 3.698 Note: Regional.241 451.36 54.53 61.030.20 60.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.38 56.55 58.00 57.945. and All Study Markets are weighted (by market population) averages.73 65.790 185.702 333.166 102.949 1.88 54.30 54.72 58.460 833.88 64.234 799.549 111.687 1.516.370 41.89 60.60 49.53 48.80 64.897 350.16 59.245 351.102 98.811 120.40 61.60 70.10 52.78 67.72 63.983 1.636.20 59.Table G: Study Market Data .153 316.796 2.557.702.475 1.671 399.89 61.014 3.30 54.933 25.678.296 179.000 1.101 256.60 50.45 63.204.20 58.34 63.554 2.30 63.00 62.120 570.438 591.93 63.83 68.220 389.42 53.86 56.000 63.26 49.24 61.10 53.

01 28.43 20.42 27.99 26.45 20.33 27.90 27.95 25.41 27.57 22.83 25.23 24.15 29.81 27.39 Note: Regional.45 28.33 21.81 25.13 23.45 29.65 26.83 24.75 27.39 21.37 27.39 22.49 31.25 28.90 26.98 25.23 26.99 28.97 23.49 25.07 26.65 27.88 22.76 25.15 24.47 28.27 20.81 28.74 21. Urban.26 27.75 22.87 26.63 24.63 25.20 20.04 24.96 22.16 21.56 22.85 28.18 28.59 28.33 22. Tax (by Grade) Rack Pt.23 25.50 25.89 26.69 23.Table H: Study Market Data .28 23.03 24.95 22.83 24.35 25.63 20. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.92 22.38 24.55 28.41 22.25 31.38 24.65 21.07 26.59 22.25 27.08 23.Rack Price.01 22.31 22.88 28.94 23.91 21.55 28.92 21.93 27.04 26.27 29.82 21.03 20.63 26.39 21.09 27.63 28.33 22.73 32.16 22.40 27.88 20.51 25.18 25.15 20.89 29.43 21.59 28.26 28.33 21.88 22.34 20.97 22.21 27.73 26.64 28.07 24.83 23.25 24.45 29.96 24.43 21.51 20.95 22.83 22.51 31.42 25.40 25.45 20.69 27.06 28.89 25.84 28.84 28.59 22.95 Premium 26.07 24.93 23.78 Product taxes Midgrade Regular 26.45 23.51 25.23 23.21 27.92 20.02 23.33 21.08 25.45 25.34 26.42 24.98 28. and All Study Markets are weighted (by market population) averages.09 24.59 28.17 20.50 20.83 24.11 26.82 28.54 28.59 24.47 20.58 25.34 25.63 21.88 28.16 29.93 23.30 29.68 Diesel 36.20 27.33 22.32 21.36 26.57 29.32 33.49 21.15 27.89 28.96 24.39 22.53 23.76 24.45 20.45 20.45 24.88 20. MJ ERVIN & ASSOCIATES 97 .03 21.42 24.28 22.07 24.48 25.49 21.45 22.36 24.43 20.45 24.47 27.97 25.92 30.81 21.33 21.33 21.43 28.

02 13.27 11.00 0. Variance uses the formula [n∑x2 .21 8.08 17.30 12.84 28.28 27.96 25.38 22.18 55.50 3.24 7.92 22.35 28.Table J: Study Market Data .34 0.83 1.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.11 31.85 21.86 28.70 22.84 5.23 7.97 0.04 23.53 21.06 28.81 28.82 3.25 1.17 9.85 24.83 36.68 2.91 0.77 37.38 2.83 21.63 60.38 28. and All Study Markets are weighted (by market population) averages.02 22.75 23.38 7.47 0. Average Deviation is the average deviation of the market values from their mean (average) value.31 28.30 5.53 6.89 21.56 24.45 6.20 5.44 56.91 29.18 21.22 5.72 26.18 7.45 1.33 9.21 24.41 7.82 32.90 59.98 0.93 56.06 5.07 0.57 12.29 8.16 20.96 28.03 28.17 11.12 23.77 30.08 0.73 2.27 62.34 1.21 8.53 22.58 1.90 23.54 50.22 1.58 66.26 5.77 5.43 0.02 0.64 3.35 27.89 0.98 0.03 7.52 5.15 66.81 26.88 31.63 58.50 10.39 56.60 14.32 31.13 11.36 0.83 27.80 9.10 6.89 28.00 4.033 0.06 0.50 58.44 33.64 2.29 24.00 22. Costs.95 6.01 31.35 58.79 33.31 34.76 5.41 29.96 27.07 30.71 33.79 0.75 28.Blended Prices.91 22.(∑x)2 ]/n2.73 1.26 27.68 7.78 2.13 0.52 30.24 7.29 7.13 28. Urban.08 55.94 Note: Regional.26 3.99 2.31 0.17 1.50 0.31 23.16 3.85 11.93 22.14 60.49 57.14 7.43 23.28 1.80 1.00 58.42 2.10 3.56 4.12 6.83 12.36 20.51 11.20 14.22 14.91 2.19 5. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.49 2.82 95 Retail Gross Product Margin 6.28 56.23 38.07 0.47 58.95 21.38 0.73 22.05 6.33 .98 1.96 3.24 23.04 0.28 1.85 26.73 10.88 5.41 12.04 28.27 6.04 22.60 23.11 26.16 54.62 56.94 22.44 25.68 7.08 3.86 49.27 60.94 17.99 0.60 7.02 3.64 3.48 7.66 28.64 1.37 26.98 31.17 26. MJ ERVIN & ASSOCIATES 98 .35 60.01 0.59 4.

117 $ 207.000 $ 156.098 $ (320.197.004.279 $ 154.510 $ 60.875 $ 255.244 95 net retail Ancillary Revenue petroleum revenue $ 208.367) $ (164. outlet costs.023 $ (15.481 $ 96.068 3. For 95 net retail petroleum revenue.289 981.630 3.144 2.640 4.900 2.209 $ 82.332) $ (238.648 3.302 $ 69.800 $ 225.Table K: Study Market Data .526 $ 207. Revenue.246 $ 118.557) $ 102. and consolidated outlet income these averages are based only on those markets with available data.993 $ 113.866) $ (244.827.632 $ 256.157.658.071.626 $ 81.638 2.074 $ 131.913 $ 139.995 $ 234.098.502 $ (80) $ 60.934 3.604.544 $ 175.677 $ 180.707 $ 260.885.852) $ 119.272 $ 118.429 $ 238.564 $ 252. MJ ERVIN & ASSOCIATES 99 . but for ancillary revenue.263 $ 60.010 1.011.241) $ (227.129 $ 97.066 3.081 $ 222.467 $ 96.550 $ 177.948 3.900 $ 179.746 $ (374.394.095.772.Sales.217 2.623 2.032 $ 77.250.089.102 $ 223.694 3.247 4.208) $ (226.794 3.135 $ 199.646) $ (98.622 $ 174.067 $ 92.542 $ 222.120 $ 54. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3. and All Study Markets are weighted (by market population) averages. these averages are based on all applicable study markets.750 $ 271.295 $ 174.265.890.719 3.000 2.058.911) $ (166.143) $ (249.014.520 5.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.223.272 $ 210.550 694.478 4. Outlet Costs.572) $ (286.013 $ 227.966 3.465.779 $ 121.375) $ (49.956) $ 200.855 $ 278.805.716 Note: Regional.000) $ (241.209 $ 26.856 3.542.780 $ 85.766) $ (274.837 $ 56.688 $ 85.871) $ (128.224 $ 189. Urban.

17 19 9.970 330. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.45 0.400 74.089 3.604 3.06 1 5.95 3 9.60 11 7.98 6.275.29 8 7.975 2.30 1.23 8 31.827 3. rank* 3.23 6 7.098 4.08 4 2.658 3.73 5 10.071 2.06 16 4.014 5.250 981 2.095 3. of Brands No.550 1.88 12 7.38 0.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No. of Outlets No.90 13 4.98 7.22 0.20 17 14.465 694 3.52 13 5.01 7 2.50 9.29 1.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.33 0.84 12 5.88 11 8.50 8.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6. MJ ERVIN & ASSOCIATES 100 .30 0.89 7.775.08 16 3.79 6.000 pop’n No. inverse ranking is used (lowest value = 1).50 3 10.47 7.40 9 4.058 1.91 17 4. N refers to study sample size (total = 481).42 5 14.51 9 11.13 2 11.475 3.315 710.310 1.47 14 3.73 14.605 16.96 5.775 678.97 8.53 10 6.24 0.60 3.10 3. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0.790 1.27 0.585 6.223 3.68 4 7.28 17.22 3.02 0.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.870 120.20 0.745 16.542.394 2.45 14.55 19 11.675 179.04 15 4.004 3.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.41 0.265 2.36 5.40 1 3.845 15.48 7 7.145 81.91 12.180 616.89 2 4.21 0.54 6 2.Table L: Study Market Data .715 14.80 10 4.06 5.Demographic Profiles Population pop’n 299 .43 12.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3.157 2.00 11.85 15 11.08 3.76 18 5.41 1.27 1.

119 . Contact: Michael J. aviation and lubricants marketing channels. Senior Advisor. cardlock. Ottawa ON. They work with major oil companies in benchmarking performance in the retail. and provide background resources to industry public affairs managers and the media. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF). Contact: Cindy Christopher. a series of studies whose goal is to strengthen Canada’s competitiveness. Vice President Public Affairs Address: 275 Slater Street. Ottawa ON. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Ottawa ON.14th Street NW Calgary AB.com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices. bulk. Contact: Brendan Hawley. Petroleum Products Address: 235 Queen Street. They maintain a large database of historical prices at most major centres. accessible through a public fax-back dial-in system. health. Principal Address: #400. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Contact: Maureen Monaghan Address: 580 Booth Street. Ervin. The SCF is the basis for this study. generate jobs and growth. and in doing so.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. safety and business issues.

The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. Contact: Robert Curran. and is a useful “window” on this industry. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. 101 . no 45-004) is a useful source of supply and demand volume data. Ottawa ON. SW Calgary. Its monthly publication “Refined Petroleum Products” (cat. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 . Managing Editor Address: Suite 2450. Calgary AB. Executive Director Address: 214.ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures. Contact: Gerard O’Connor.6th Ave. Octane is published quarterly. Energy Section Address: Statistics Canada. Supervisor. Contact: Len Bradley.Octane Magazine Octane is Canada’s refining and marketing trade journal. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. 311 .ab.6th Avenue.

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